Law Decoded: The year of the Crypto Futures Trading Commission, Sept. 25–Oct. 2

The end of the U.S. federal government’s fiscal year brought a cascade of major announcements from agencies.

Every Friday, Law Decoded delivers analysis on the week’s critical stories in the realms of policy, regulation and law.

Editor’s note

In a tweet late last night, President Trump said that he and Melania had tested positive for COVID-19. If you weren’t already aware of that, you may want to catch up on a deluge of wishes for life and death, alongside speculation as to Trump’s announcement being a hoax, before sitting down to this week’s Law Decoded. Or possibly not.

Every week leading up to the presidential election features more amplified headlines. Law Decoded is likely not the ideal place to keep up with that news. By nature, this newsletter is not apolitical, but it is decidedly wonkish in its focus on politics, even as Brian Armstrong may have stigmatized the concept of a “mission focused” entity.*

*Although Law Decoded dogmatically opposes the crypto community’s overriding ignorance of proper hyphen usage. 

Lost in the mix of the whole election cycle is the end of the U.S. federal government’s fiscal year this week. Paying attention to fiscal years is not the most glamorous of pursuits, but the consequences have been huge. Government agencies fall under pressure to wrap up work that landed in a previous year’s budget. Crypto has seen an overload of news from U.S. agencies, but this week none upstaged the Commodity Futures Trading Commission.

The CFTC regulates derivatives markets in the U.S. Its authority derives from the Commodity Exchange Act of 1936, but the commission itself dates to 1974, making it 40 years younger than the related regulator, the Securities and Exchange Commission.

The nature of what is defined as commodities is that their value derives from a wider market. Securities depend on a third party to do their job right. Consequently, the CFTC is generally a less aggressive regulator, primarily interested in monitoring exchange markets themselves. Recent trends have put increasing authority over crypto markets in the CFTC’s hands. This week’s leading stories are chronologically reversed, backtracking the commission’s recent moves to bring crypto markets to heel, beginning with the driving story of yesterday.

Kollen Post, Policy Editor, @the_postman_

Bitmex gets rekt

Massive crypto exchange and derivatives platform Bitmex sees landmark charges in the U.S.

The CFTC and the Department of Justice filed joint complaints against Bitmex and its founders and an early employee. The CFTC charges that Bitmex knowingly offered derivatives trading to U.S. investors without registering as a commodities exchange. The commission demands a return of customer funds, as well as an as-of-yet undetermined penalty.

The DoJ, on the other hand, accuses the exchange of deliberately facilitating money laundering as part of its business model. The alleged violations of the Bank Secrecy Act carry with them hard time in federal prison.

Authorities arrested one of the four Bitmex executives named, but the other three remain on the lam. You’d imagine that tech-savvy billionaire money launderers would be well-equipped to lead the FBI on a Hollywood-worthy cat-and-mouse chase. As always, we will see.

One theme that the Bitmex case will certainly explore extensively is defining an exchange’s duty to establish itself as outside the U.S. Bitmex, with its 100x leveraged trading and its founder, Arthur Hayes, joking about bribing Seychelles authorities with coconuts, may well have drawn the ire of authorities out of hubris. To Bitmex’s point, it seems the exchange did indeed block U.S. IP addresses, but crypto investors are quite VPN-forward. faced a similar issue before the SEC with its initial coin offering for EOS. But it’s clearly a challenged to keep crypto from crossing borders. The question is, will every company that handles crypto ultimately have to register with the most stringent regulatory regimes?

PaxForex: An appetizer for Bitmex

On Monday, the CFTC publicized a complaint against PaxForex that, in retrospect, looks like a warm-up for the subsequent Bitmex bombshell.

The case against PaxForex parent firm Laino Group did not include criminal charges. As with the Bitmex case, the CFTC is alleging that PaxForex deliberately solicited U.S. retail investors in its futures and swaps trading on Bitcoin, Litecoin, Ether, gold and foreign currencies without registering with the CFTC.

PanForex is registered in St. Vincent and the Grenadines — like the Seychelles where Bitmex resides, a famously opaque jurisdiction for company registration. The CFTC may have been especially interested in PanForex because its derivatives offerings included both crypto and more traditional commodities already established as within the CFTC’s purview, providing a clear bridge.

The overall message is fairly clear. The CFTC is actively corralling crypto platforms offering U.S. persons investments that the CFTC handles, regardless of where in the world they claim to be.

More info on commodity classification

Alongside the CFTC’s push in the courts, earlier new bills before the House Financial Services Committee and the Agriculture Committee look to establish national registration for crypto exchanges with the CFTC.

Law Decoded has previously written about the new legislation and, as a matter of principle, hates retreading old ground, especially given the ready availability of new and exciting stories. But given recent news as well as new commentary from the Ranking Member of the Agriculture Committee who introduced the bill, a new big picture is coming into focus. That is, we may be witnessing a pretty broad move to corral a wider range of crypto business in the CFTC’s stable.

Many people in crypto are sympathetic to, say, Bitmex, especially in light of perceived ineffectual AML controls on government-approved institutions that came out in last week’s FinCEN leak. And, as always, many are just suspicious of government control over finance. But given that this time last year, as Facebook’s Libra faced a drubbing before the House Financial Services Committee and the SEC seemed free to lay claim to basically everything tokenized, Law Decoded would like to affirm that — as a bleak year trudges to its end — this is actually progress.

Further reads

Lawyers from Polsinelli lay out the new steps for the simplified settlement of digital securities laid out in the SEC’s newest crypto-linked no-action letter.

Writing for Reason, Andrea O’Sullivan objects to the media’s seeming emphasis on FinCEN not spying on transactions enough.

The Wall Street Journal’s David Uberti and Jack Hagel break down the Treasury’s warning against ransomware payouts, which OFAC says may well violate sanctions.

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