Bitfinex, a Hong Kong-based bitcoin exchange, was recently fined $75,000 by the CFTC for offering illegal off-exchange financed retail commodity transactions in bitcoin and other cryptocurrencies, and for failure to register as an FCM. According to the CFTC Order, from April 2013 to at least February 2016, Bitfinex permitted U.S. customers to borrow funds in order to trade bitcoins on a leveraged, margined or financed basis in violation of Section 4(a) of the Commodity Exchange Act.
In addition, the CFTC Order noted that during part of the relevant period, the bitcoins were not actually delivered to the traders that purchased them, but rather were held in an omnibus deposit wallet that was owned and controlled by Bitfinex. According to the CFTC Order, certain customers (referred to as “Financing Recipients”) would finance their transactions through the use of leverage provided by other market participants known as “Margin Funding Providers.” Once a transaction was completed, Financing Recipients could not take possession of their bitcoins until they had paid back the Margin Funding Providers.
In the CFTC Order, the CFTC makes a point of discussing the requirements of actual delivery as interpreted by the Eleventh Circuit in the Hunter Wise precious metals case. As noted by the CFTC and the Eleventh Circuit, “actual delivery denotes the act of giving real and immediate possession to the buyer or the buyer’s agent. Actual delivery is distinct from constructive delivery.” In addition, the CFTC noted that actual delivery requires “the physical delivery… into the possession of the buyer, or a depository other than the seller or its affiliates. A book entry purporting to show delivery will not suffice.”
Because the transactions allegedly did not result in actual delivery, Bitfinex could not rely upon the exception for spot transactions set forth in Section 2(c)(2)(D)(ii)(III)(aa) of the Commodity Exchange Act. Since Bitfinex was not registered as a DCM, the transactions were considered to be “off-exchange.” Finally, Bitifinex was found to have been acting as an unregistered FCM because it accepted orders and received funds in connection with retail commodity transactions.