San Francisco-based Coinflip Inc., doing business as Derivabit, reached an agreement with The United States Commodities Future Trading Commission. The company agreed to comply with a CFTC Cease and Desist Order, which alleged that Derivabit brokered bitcoin option contracts between March and August 2014 without being properly registered with the Securities and Exchange Commission, in violation of the Commodity Exchange Act (CEA) and related CFTC guidelines.
The bitcoin options trading platform subsequently discontinued illegally offering bitcoin options and will no longer operate an unregistered facility for trading or processing of "swaps."
Coinflip owner and Chief Executive Officer Francisco Riordan was held personally accountable for Coinflip's violations of CEA regulations. The commission noted that Riordan did not act in good faith or knowingly induced, directly or indirectly, Coinflip's unregistered trading activities. These activities were found to have violated ordinances related to selling put and call options and swaps, which require being a registered swap execution facility or designated contract market, according to the Commission.
Legal analysts expect the order to broadly impact all crypto-currencies, which have now been officially deemed commodities and, as such, subject to the same rules and procedures as any other commodity or fiat currency listed on the commodities exchange. Aitan Goelman, Director of Enforcement at the CFTC, stated that virtual currencies have generated a lot of excitement, but their relative newness does not exempt them from rules that apply to "all participants in the commodity derivatives markets."
Goelman noted that Coinflip and Riordan cooperated with the Division of Enforcement's investigation and have reached a settlement. Settlement terms have not been disclosed.
The CFTC, established in 1974, is the regulatory body for the Commodities Exchange Act initially passed in 1936 and continually updated in response to changing trends in futures and options trading. The CFTC's regulatory and deregulatory actions are published in the Unified Agenda of the Regulatory Information Service Center (RISC), created in June 1981 to provide information on all regulatory activities to government officials and the general public.
The CFTC decision, which addresses the role of virtual currencies in derivatives trading, follows similar precedents set by other regulatory bodies, as local and federal government agencies attempt to clarify the role of virtual currencies in the financial ecosystem. For example, SEC brought action against the SatoshiDICE and FeedZeBirds bitcoin exchanges in June 2014.
The unregistered exchanges were publicly selling bitcoin shares without being registered with the SEC, in violation of the Securities Act of 1933. Owner Erik T. Voorhees returned proceeds of approximately $15,000 and paid a $35,000 penalty to the SEC. Voorhees further agreed to not issue any security in an unregistered transaction in exchange for any virtual currency including bitcoin for a period of five years.
"All issuers selling securities to the public must comply with the registration provisions of the securities laws, including issuers who seek to raise funds using bitcoin," said Andrew J. Ceresney, Director of the Enforcement Division at the SEC. "We will continue to focus on enforcing our rules and regulations as they apply to digital currencies."
Payments analysts and securities traders expect to see more regulation in the emerging virtual currency space. Today, it's derivatives trading, and tomorrow it may be banking or peer-to-peer money transfer, according to industry bloggers.
Bitcoin news service NewsBTC blogger "Gautham" noted that different divisions of the U.S. government have tried to define and control bitcoin and other virtual currencies, "starting with bitcoin being considered as currency by FinCEN [Financial Crimes Enforcement Network], money by SEC, property by the IRS and recently commodity by CFTC." He further noted that the CFTC's order "has enraged the bitcoin community," prompting internal debate concerning the validity of the CFTC order.
Will Madden, founder and CEO of the bitcoin blog bridge21, noted that CFTC Chairman Timothy Massad had declared virtual currencies as commodities in a December 2014 address to the Senate Committee on Agriculture, Nutrition and Forestry.
"I think it is important for the CFTC to be aware that its regulatory stick could easily damage the bitcoin market in the U.S. if not used carefully," Madden wrote in a Sept. 22, 2015, post. "The CFTC should also recognize that it is a mature body with a long history, and bitcoin is a technology still in its infancy, with applications that are not even financial in nature."
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