The Commodity Futures Trading Commission filed and simultaneously settled charges against Coinflip, Inc. and Francisco Riordan, its founder and chief executive officer, for operating a trading facility for Bitcoin options – Derivabit – without it being registered as a swap execution facility or a designated contract market.
According to the CFTC, because Bitcoin and other virtual currencies are “properly” defined as “commodities” under applicable law, all trading facilities for commodity options on Bitcoin must be registered with it as a SEF or a DCM, said the CFTC.
Since from at least March 2014 through July 2014, Coinflip operated Derivabit as a trading facility for Bitcoin options without proper registration, it violated applicable law, claimed the CFTC. Additionally, said the Commission, Mr. Riordan was liable for Coinflip’s violation as its so-called “controlling person.”
To resolve the CFTC’s charges, Coinflip and Mr. Riordan agreed to cease and desist from violating applicable law. No financial penalty was included in the settlement.
Although Timothy Massad, Chairman of the CFTC, previously implied that virtual currencies are “commodities” under applicable law and within the remit of the CFTC, this enforcement action marked the first unequivocal statement of the Commission’s view. (Click here for Mr. Massad’s December 10, 2014 testimony before the U.S. Senate Committee on Agriculture, Nutrition and Forestry, including his statements on the CFTC’s jurisdiction over virtual currencies.)
Two weeks ago, LedgerX LLC received temporary registration as a SEF by the CFTC in order to list and clear fully collateralized, physically settled options on Bitcoin. The firm’s application as a derivatives clearing organization is still pending.
Legal Weeds: Although in its Coinflip order the CFTC simply proclaimed that Bitcoin and other virtual currencies are “commodities” under applicable law, its legal conclusion appears correct. Under applicable law, commodities are broadly defined as any goods, articles, services, rights and interests “in which contracts for future delivery are presently or in the future dealt in” with two exceptions: onions and motion picture box office receipts, or any "index, measure, value or data related to such receipts.” Moreover, with limited exceptions (most notably, involving securities), the CFTC has exclusive jurisdiction under applicable law with respect to all trading of commodities of the nature of options, futures and swaps, including over most market participants. Inevitably, at some point, there likely will be a challenge to the New York State Department of Financial Service’s effort to regulate certain virtual currency transactions and intermediaries through imposition of its so-called “BitLicense” and other requirements to the extent such obligations impact activities and persons under the exclusive jurisdiction of the CFTC. Stay tuned! (Click here for to review the relevant provision of law related to the definition of a commodity and here for the scope of the CFTC’s exclusive jurisdiction. Click here for background on the NYS Department of Financial Services’ “BitLicense” requirements in the article “NYDFS Issues BitLicense Framework for Regulating Virtual Currency Firms” in the June 7, 2015 edition of Bridging the Week.)