On September 17, 2015, the CFTC issued a cease and desist order (“Order”) against Coinflip, Inc. (“Coinflip”) and its CEO for operating a Bitcoin options trading platform in violation of the Commodity Exchange Act (“CEA”) and CFTC rules. In doing so, the CFTC for the first time held that Bitcoin and other virtual currencies are commodities covered by the CEA.

The Order found that for approximately 6 months during 2014, Coinflip unlawfully operated an unregistered online facility called Derivabit, which offered to connect buyers and sellers of Bitcoin options. Users posted bids and offers for the options, which Coinflip confirmed by communicating them to all users through its website. Derivabit was not registered as either a swap execution facility (“SEF”) or a designated contract market as is required of derivatives trading platforms under the CEA and CFTC rules.

The Order also sanctioned Coinflip’s CEO, Francisco Riordan, as a control person of Coinflip for CEA purposes. Coinflip and Riordan agreed to cease and desist from future violations.

No civil monetary penalties or trading bans were imposed on Coinflip or its CEO. Although the Order did not explain the CFTC’s forbearance in this regard, presumably, it was at least partly because this was a case of first impression. Future violators with respect to the trading of Bitcoin derivatives may not receive such leniency.

The Order comes just a week after the CFTC, on September 10, similarly exercised jurisdiction over Bitcoin derivatives by approving the application of another Bitcoin options trading platform – LedgerX LLC (“LedgerX”) – to register as a SEF. LedgerX is not expected to begin operations until the CFTC approves the registration of its clearinghouse for Bitcoin derivatives; the CFTC’s review period for the LedgerX clearinghouse extends through October 31, 2015.

The CFTC is the latest government agency to address the virtual currency phenomenon, joining, among other agencies:

  • the Financial Crimes Enforcement Network, which has dispensed anti-money laundering (“AML”) guidance regarding virtual currencies and recently issued its own AML enforcement order against a virtual currency exchange;
  • the New York Department of Financial Services, which has promulgated final “BitLicense” regulations and just issued its first BitLicense;
  • the Conference of State Banking Supervisors, which published a model framework for state licensing of entities involved in virtual currency activities; and
  • the Internal Revenue Service, which has characterized Bitcoin and other virtual currencies as property for purposes of the application of the federal tax rules.
  • Norton Rose Fulbright is publishing a global legal and regulatory guide to cryptocurrencies. The guide is being published in a series of chapters covering a range of legal and regulatory issues relating to cryptocurrencies. You can download the first chapter and register to receive subsequent chapters here.