CFTC Continues its Focus on Bitcoin in Settlement with Swap Execution Facility
In another move reflecting its focus on the regulation of Bitcoin and other virtual currencies, the U.S. Commodity Futures Trading Commission on September 24, 2015 settled charges against TeraExchange LLC, a provisionally-registered Bitcoin swap execution facility (known as an “SEF”). The charges stem from a non-deliverable forward contract executed on October 8, 2014, which constituted “wash trading” and “prearranged trading” in violation of the Commodity Exchange Act. This action by the CFTC comes one week after it issued an order regarding Coinflip, Inc. in which it presented – for the first time – its conclusion that Bitcoin and other virtual currencies fall within the CFTC’s definition of “commodities.”
According to the Tera order, on October 8, 2014, two traders (who were the only traders authorized to trade on the Tera SEF at that time) executed a transaction in a non-deliverable forward contract based on the relative value of the U.S. Dollar and Bitcoin. Immediately thereafter, the same two traders executed a fully offsetting transaction in the Bitcoin swap for the same price and notional amount. The two transactions – which had the effect of completely offsetting each other – were pre-arranged (and facilitated) by Tera with the understanding that the traders would execute “a round-trip trade with the same price in, same price out (i.e. no P/L [profit/loss] consequences) no custodian required.”
Although the purpose of this pre-arranged transaction was to “test the pipes” of the Tera SEF, the next day Tera issued a press release, and its then-president made statements at a meeting of the CFTC’s Global Markets Advisory Committee announcing the transaction, in each case with the intention of creating the impression of actual trading interest in the Bitcoin swap. Neither the press release nor the president’s statements indicated that the transactions were pre-arranged wash sales executed solely for the purpose of testing Tera’s systems.
The order made clear that the facts regarding Tera “should be distinguished from a situation where a SEF or other designated contract market runs pre-operational test trades to confirm that its systems are technically capable of executing transactions and, to the extent that these simulated transactions become publicly known, makes it clear to the public that the trades do not represent actual liquidity in the subject market.”
The CFTC has ordered Tera to refrain from further violations of the Commodity Exchange Act. No monetary penalty was levied against Tera.
As a result of this order and the CFTC’s September 17, 2015 order regarding Coinflip, it is clear that platforms that deal in Bitcoin and other virtual currencies must be mindful of the CFTC’s rules and regulations when structuring and conducting their operations. The failure to do so could have serious consequences.
