Bitfinex pays $75,000 to settle with CFTC for offering illegal bitcoin transactions and failing to register

The U.S. Commodity Futures Trading Commission (CFTC) has ordered Bitfinex to pay $75,000 for offering illegal off-exchange financed retail commodity transactions, and failing to register as a futures commission merchant.

Formed under the laws of the British Virgin Islands, with their official headquarters in Hong Kong, Bitfinex operates one of Bitcoin’s most popular platforms for exchanging and trading bitcoins, litecoins, and ether.

The exchange has become the number one bitcoin exchange by USD volume, and has consistently made headlines for innovations such as being the first to integrate BitGo wallets, adding new functionality including margin trading or liquidity swaps.

Company representatives have been cooperating with the CFTC's investigation since September 17, 2015. “During the course of the investigation conducted by the Division of Enforcement, Bitfinex consistently responded to requests for information fully and quickly, both in writing and via oral presentations,” states  the CFTC.

- Bitfinex

Section 4(a) of the US Commodity Exchange Act (CEA) requires financed retail commodity transactions to be conducted on a designated contract market or derivatives transaction execution facility. Section 4d(a) mandates the registration of any persons facilitating such transactions. In the CFTC’s findings, BFXNA Inc (Bitfinex)  has never registered with the Commission in any capacity.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the original CEA, adding a section entitled “Retail Commodity Transactions.” The new section requires said transactions to be conducted on a regulated exchange and subjects them to the CFTC’s anti-fraud authority. “However, the Section does not apply if ‘actual delivery’ of the commodity is made within 28 days,” the commission interprets.

- CFTC

The commission ruled that there was no actual delivery in Bitfinex transactions, citing a federal court of appeals' case which ruled that actual delivery “requires a transfer of ‘possession and control’ of the commodity and giving real and immediate possession to the buyer or the buyer’s agent.”

Bitfinex holds bitcoin in a wallet of its own, on behalf of its customers, retaining “the authority to force liquidate customers' positions without the customers' prior consent if their equity fell beneath a preset level,” according to the commission.

- CFTC

Without actual delivery of bitcoins, Bitfinex could not rely on the exception to the CFTC’s jurisdiction over retail commodity transactions.

Furthermore, many of Bitfinex's customers were retail customers or individual investors who did not meet the $10 million discretionary investment threshold to be considered Eligible Contract Participants (ECPs).

ECP classification permits these persons to engage in transactions not generally available to retail customers. The exchange also engages in margin trading which also falls under the Commission's jurisdiction.

- CFTC

In September 2015, the Commission ruled that bitcoin is a commodity, subject to CEA in the case of Coinflip and Francisco Riordan.

Following discussions with the CFTC’s Division of Enforcement, Bitfinex announced that it has made “significant changes to the way in which U.S. customers engage in financed trading on Bitfinex.” The company believes that it is now complying with applicable laws and regulatory requirements.

Bitfinex now has ten days to pay the $75,000 penalty in full. If full payment is not received, post-judgement interest will accrue, which Bitfinex will also be liable to pay.