Shockwaves across the cryptocurrency industry were delivered by the Commodity Futures Trading Commission (CFTC) after the commission announced a $1.25 million settlement order with one of the industry’s largest market contributors called Kraken. The following day, each of 14 entities had been charged by the commission for offering cryptocurrency derivatives and margin trading devoid of listing as a futures commission merchant (FCM), stated the CFTC. Apart from its past issuance of regulatory guidance and involvement in certain regulatory actions, CFTC has now gained the status of a significant regulator of the industry for itself in conjunction with other agencies namely: the US Securities and Exchange Commission (SEC), the US Department of Justice (DOJ) and the US Department of the Treasury (Treasury). Market participants should be conscious that the CFTC will maintain to hold a more active role in the regulation and administration of commodities and derivatives trades moving forward.
In an order issued by the CFTC on September 28, 2021, charges were filed and settled against Payward Ventures, Inc. doing business as Kraken for proposing margined retail goods transactions in cryptocurrency—including Bitcoin—and lacking to register as an FCM. Respondent is asked to pay a $1.25 million domestic monetary fine and to keep it away from further violations of the Act. According to the CFTC, “This act is part of the CFTC’s broader attempt to protect U.S. buyers.”
The CFTC claimed that each of the suspects was acting as an unregistered FCM. Under Section 1a(28)(a) of the Commodity Exchange Act (the Act), 7 U.S.C. § 1(a)(28)(A), an FCM is any “individual, association, partnership, or trust that is involved in soliciting or taking orders for the buying and selling of a commodity for future delivery; a security futures product; a swap . . . any commodity option permitted under section 6c of this title; or any leverage transaction authorized under section 23 of this title.” To be deemed an FCM, that body must also “accept [] money, securities, or property (or extends credit instead thereof) to margin, guarantee, or secure any trades or deals that end or may end therefrom.”
While the SEC, Treasury, and DOJ are often thought the most prominent state regulators in the cryptocurrency room, the CFTC also possessed a history for such sweeps. It went to trial for alleging an individual of running a boiler room and got the victory in 2018. In addition to this, the CFTC entered a case against BitMEX, a well-known cryptocurrency exchange, for not registering as an FCM, in October 2020. However, the recent step is huge for the CFTC, as it targeted multiple markets players within two days.
Due to the rise in popularity of cryptocurrency and categorization of crypto commodities as a monetary product subject to regulation in past few years, participants should anticipate more regulatory events from all US regulators. Though controlling guidance has been issued, regulators are executing the strategy of regulatory guidance by enforcement action. Therefore, Market contributors will need to be thoughtful about all related regulatory procedures to determine what fulfillment activities are required.