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Bitcoin exchange Bitfinex hit with USD75,000 CFTC penalty

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The US CFTC has ordered Hong Kong-based bitcoin exchange, BFXNA Inc (Bitfinex) to pay a USD75,000 civil penalty for offering illegal off-exchange financed retail commodity transactions in bitcoin and other cryptocurrencies.

The penalty also relates to Bitfinex’s failure to register as a Futures Commission Merchant (FCM) as required by the Commodity Exchange Act (CEA).  

Bitfinex operates an online platform for exchanging and trading cryptocurrencies, mainly bitcoins.  The CFTC order finds that from April 2013 to at least February 2016, Bitfinex permitted users to borrow funds from other users on the platform in order to trade bitcoins on a leveraged, margined, or financed basis.  The Order also finds that Bitfinex did not actually deliver those bitcoins to the traders who purchased them.  Instead, Bitfinex held the bitcoins in deposit wallets that it owned and controlled, the Order states.

As explained in the Order, 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.  As one federal court of appeals recognised, “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.”  CFTC v Hunter Wise Commodities LLC, 749 F.3d 967, 978-79 (11th Cir. 2014).

The Order finds that by offering to enter into, executing, and/or confirming the execution of off-exchange financed retail commodity transactions, Bitfinex violated Section 4(a) of the CEA, which requires such transactions to be conducted on a designated contract market or derivatives transaction execution facility.  The Order further states that because the transactions did not result in actual delivery of bitcoins, Bitfinex could not rely on the exception to the CFTC’s jurisdiction over such transactions, found in Section 2(c)(2)(D)(ii)(III)(aa) of the CEA. 

The Order further finds that Bitfinex accepted orders and received funds in connection with retail commodity transactions without being registered with the CFTC as an FCM, as required by Section 4d(a).  The Order explains that FCMs include all persons engaged in soliciting or accepting orders for retail commodity transactions, or who accept money in connection with such transactions.  However, according to the Order Bitfinex has never been registered in any capacity.  Bitfinex therefore violated Section 4d(a) of the CEA.

In the Order, the CFTC recognises Bitfinex’s cooperation with the Division of Enforcement’s investigation, and that Bitfinex voluntarily made a number of changes to its business practices in order to attempt to come into compliance with the CEA.

CFTC Division of Enforcement staff members responsible for this action are Melissa Cavers, Michael Frisch, Susan Gradman, Scott Williamson, and Rosemary Hollinger.

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