CFTC Fines Crypto Companies $42.5 Million – Finance and Banking

The CFTC fined a crypto company for falsely claiming
that its coins were backed by U.S. dollars (“USD”)
and a second crypto company for executing
illegal, off-exchange retail transactions in digital assets
commodities. The fines totaled $42.5 million.

In one Order, the CFTC found that the company Tether falsely
claimed that it held in reserves enough fiat to back each and every
one of its USD “tether” tokens in circulation at all
times. The CFTC stated that the company failed to disclose that it
maintained reserves, which in part included unsecured receivables
and non-fiat assets, in accounts other than company bank accounts.
In addition, the CFTC noted that the company failed to (i) track
the real-time status of the reserves as a result of its use of a
manual process and (ii) regularly audit the reserves.

As a result of its findings, the CFTC determined that the
company violated CEA Section 6(c)(1) (“Prohibition against
manipulation”) and CFTC Rule 180.1(a)(2) (“Prohibition on the
employment, or attempted employment, of manipulative and deceptive
devices”). To settle the charges, the company agreed to (i)
cease and desist from future violations and (ii) a $41 million
civil monetary penalty.

In the second Order, the CFTC found that the company Bitfinex
offered, executed and confirmed for execution digital assets
transactions involving non-eligible commercial entities and retail
customers. The CFTC also determined that the company accepted
orders and payments for retail commodity transactions without
registering as a futures commission merchant (“FCM”).

As a result, the CFTC determined that the company violated CEA
Sections 4(a) (“Restriction on futures
trading”) and 4d(a)(1) (“Futures commission merchant
registration requirements; duties of merchants in handling customer
receipts”). The company had previously settled violations of the same CEA
provisions in 2016. The CFTC found that the company violated its
2016 Order. To settle the charges, the company agreed to (i) cease
and desist from future violations, (ii) a $1.5 million civil
monetary penalty and (iii) compliance undertakings.

In a statement, CFTC Commissioner Dawn DeBerry Stump concurred
with the CFTC’s findings against the crypto companies. However,
Ms. Stump expressed concern that the CFTC’s
application of the CEA’s definition of “commodity” to
stablecoins gives the impression that stablecoins are within the
scope of the CFTC’s regulatory authority. Ms. Stump clarified
that the definition of “commodity” is “relied upon
in applying the anti-fraud provisions in CEA Section 6(c),”
and that the CFTC does “not regulate stablecoins” and
does not “have daily insight into the businesses of those who
issue such.” Ms. Stump noted SEC Commissioner Hester M.
Peirce’s recent question as to whether regulators
are “fighting for investors or . . . fighting for
jurisdiction” in the digital asset space. Ms. Stump reiterated
that if the CFTC is to hold exchanges accountable for acting as
FCMs, then it should clarify the legal requirements applicable to
an exchange that seeks to register as an FCM and how the CFTC will
apply the CEA’s requirements to such entities.

Commentary

Participants in digital assets markets may view these
enforcement actions as evidencing governmental hostility to digital
assets, but they are better viewed as routine enforcement actions
against persons acting clearly in violation of U.S. law.  As
to Tether, notwithstanding its self-description as an issuer of
“stablecoin,” the company effectively operated as an
investment company that was likely subject to SEC registration
under the Investment Company Act. Of course, it would not have been
able to comply with the regulatory requirements for numerous
reasons, not least of which were various conflicts of
interest. Likewise, Bitfinex was clearly engaged in trading in
derivatives on digital assets in violation of U.S. law.

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Commentary

Commissioner Stump’s public statement is notable for two
reasons.

First, she raises the important issue of regulatory
authority in referring to the CFTC’s application of the
CEA’s definition of “commodity” to stablecoins.
Previously, Commissioner Stump addressed this issue  in a publication
attempting to clarify the scope of the CFTC’s
regulatory authority and enforcement authority (see in
particular points 3-4 and 7-9). 

Second, these enforcement actions mark the second time that
Commissioner Stump made public remarks emphasizing the
uncertainty around the CFTC’s application of FCM rules to an
exchange on which retail commodity transactions are traded. In
a previous CFTC enforcement action, Commissioner
Stump described as “uncharted territory” such application of
the Commodity Exchange Act’s FCM rules in the context
of retail commodity transactions. The CFTC should clear up the
uncertainty on this issue.

Cadwalader’s Steven Lofchie contributed to this
comment.

Primary Sources

1.  CFTC Order: Tether Holdings Limited, et
   al




2.  CFTC Order: BFXNA Inc., et al




3. CFTC Press Release: CFTC Orders Tether and
   Bitfinex to Pay Fines Totaling $42.5 Million




4. CFTC Statement, Dawn D. Stump: Concurring
   Statement by Commissioner Dawn D. Stump Regarding Tether and
   Bitfinex Settlement

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