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CFTC Signals That Some Digital Assets Are Subject to Registration Requirements

What Happened?

On September 7, 2023, the CFTC brought settled enforcement actions against three decentralized entities, Opyn, Inc., ZeroEx, Inc., and Deridex, Inc. The CFTC charged two of those entities, Deridex and Opyn, with registration violations in connection with the trading of smart contracts that the Commission deemed to be swaps.

Regulatory Landscape for Digital Assets

The CFTC’s authority in the spot digital asset space is currently limited to matters of fraud and manipulation. It has no applicable safety and soundness regulations as it does for the derivatives markets, which include futures, options, and swaps.

The courts, to date, have found that certain digital assets, such as Bitcoin, meet the definition of a commodity and are therefore subject to the CFTC’s antifraud jurisdiction.  Any digital assets that meet the definition of a future, option, or swap are also subject to the Commission’s full complement of registration requirements.

Specifically, Deridex and Opyn were charged with failing to register as a swap execution facility or designated contract market, failing to register as a futures commission merchant (FCM), and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs.  ZeroEx, Opyn and Deridex were also charged with illegally offering leveraged and margined retail commodity transactions in digital assets. The Commission alleged that these violations occurred in connection with blockchain-based software protocols and smart contracts that functioned similarly to trading platforms. Opyn, ZeroEx, and Deridex agreed to pay civil monetary penalties of $250,000, $200,000, and $100,000, respectively.

Implications of Enforcement Actions on the Crypto Industry

The CFTC’s action follows in the footsteps of the SEC. After repeated warnings from Chair Gary Gensler to the industry that the Commission viewed most digital assets as securities subject to the Commission’s rules regarding custody, execution, clearance, and settlement of transactions, on March 29, 2023, the SEC brought an enforcement action alleging registration failures against crypto trading platform Beaxy and its executives for operating an unregistered exchange, broker, and clearing agency. 

While the SEC’s enforcement action was a matter of if and not when, the CFTC’s action was somewhat of a surprise, especially given Chairman Rostin Behnam’s public statements regarding the limited nature of the CFTC’s reach into the overall safety and soundness of the digital asset space.  Digital assets can take on myriad forms, and the financial instruments in the CFTC matters, characterized as smart contracts, met the CFTC’s definition of swaps subject to the Commission’s regulatory oversight.

Given the novelty of these issues, the relatively low civil monetary penalties are not surprising. Digital asset regulation is a political hotbed, and the SEC’s matters in active litigation are as much about politics as they are about the law. The CFTC likely wanted to avoid an avalanche of criticism of regulation by enforcement while sending the message that it will police any unsanctioned activity within its regulatory purview.

Reporting Violations

Whistleblowers can report any potential violations of the Commodity Exchange Act, including potential registration violations involving FCMs and any other entities regulated by the CFTC.

If you are aware of any Commodity Exchange Act violations and would like to talk to experienced whistleblower lawyers about your matter, please contact us for a free, confidential review of your matter.

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