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.
"We are pleased to announce this settlement with the CFTC. The CFTC has engaged in a productive, open, and timely dialogue with us, and, as a result, we believe we have a better understanding of the regulatory framework governing financed trading on our platform.”
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.
“Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), financed commodity transactions – including those in cryptocurrencies like bitcoin – must be conducted on an exchange, unless the entity offering the transactions – such as Bitfinex – can establish that actual delivery of the bitcoins results within 28 days.”
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.
“Bitfinex offered to enter into, executed, and/or confirmed the execution of financed retail commodity transactions. None of the financed retail commodity transactions were conducted on or subject to the rules of a board of trade that has been designated or registered by the CFTC as a contract market or derivatives transaction execution facility. Bitfinex therefore violated Section 4(a) of the Act.”
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.
“Bitfinex accepted orders for retail commodity transactions and received funds from those customers in connection with retail commodity transactions. Bitfinex was not, however, registered with the Commission in any capacity. Therefore, Bitfinex violated Section 4d(a) of the Act.”
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.