In 15 recent enforcement actions, the Commodity Futures Trading Commission (CFTC) announced charges against various digital asset exchanges for failure to register appropriately as futures commission merchants (FCMs). This series of actions is the latest in an ongoing regulatory crackdown across federal agencies involving cryptocurrency and other digital asset trading platforms.

On September 29, 2021, the CFTC announced charges against 14 separate cryptocurrency trading platforms for failing to register with the CFTC as futures commission merchants (FCMs), or falsely claiming to be registered.  Twelve of the administrative complaints allege that the various respondents offered binary options off the value of commodities, such as foreign currencies and cryptocurrencies (including bitcoin), without registration as an FCM.  Two other administrative complaints allege that the respondents offered services relating to trading in forex or cryptocurrencies, such as bitcoin, while falsely claiming to be registered with the CFTC and a member of the National Futures Association (NFA).

These actions followed an announcement on September 28, 2021, that the CFTC had settled charges with another prominent digital exchange (the Company). In this case, the Company settled CFTC charges for engaging in illegal off-exchange trading of retail commodity transactions with US customers that were not eligible contract participants (ECPs) and failing to register as an FCM.

According to the CFTC, from June 2020 to July 2021, the Company enabled US customers that were not ECPs to engage in retail commodity transactions involving digital assets, including bitcoin. The Company facilitated the execution of these transactions by extending margin to its customers, which were used to buy or sell digital assets on the exchange on a leveraged basis. The CFTC determined that the Company violated the Commodity Exchange Act because, among other allegations, the Company entered into or executed such margined transactions with non-ECP US customers that did not result in actual delivery in 28 days, the retail margin commodity transactions were not conducted on a designated contract market, and because it accepted orders for retail commodity transactions and accepted customers’ assets in order to margin those transactions.

In a concurring statement, CFTC Commissioner Dawn D. Stump noted that the CFTC’s findings against the Company were influenced by the CFTC’s Final Interpretive Guidance on retail commodity transactions involving certain digital assets. She emphasized that as the Final Interpretive Guidance becomes more important to the CFTC’s enforcement activities, the CFTC should seek to replace the Final Interpretive Guidance “with rules that are based on current input from market participants and members of the public.” Further, Commissioner Stump observed that the application of the CFTC’s FCM regulations to an exchange like the Company is “uncharted territory at this time,” and if the CFTC intends “to hold an exchange liable for operating as an unregistered FCM with respect to retail commodity transactions, it is incumbent upon the [CFTC] to explain in a transparent manner the relevant legal requirements for such an entity that seeks to register as an FCM and how the [CFTC] will apply them in enabling the entity to conduct business with US customers.”