Do you have questions about cryptocurrency CPO issues? Are cryptocurrency traders, exchange platforms, and investment advisors need to register as broker-dealers? It depends. Let’s unpack the issue.
The Dodd-Frank Act and Cryptocurrency CPO Matters
The rules regarding who must register with whom are largely outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act, and cryptocurrency traders functioning as commodity pool operators must register with the appropriate agencies.
Hold up, What Are Commodity Pool Operators?
Commodity pool operators are individuals who work on behalf of funds that trade futures and foreign exchange contracts. In most scenarios, they make trading decisions and advise about investments on behalf of invested parties.
Most CPOs have two trenches: associated persons and principals. The former are usually employees who solicit orders and hunt for new investors. Principals are vested parties who control the business interests of the pool.
Sometimes, CPOs operate independently. Others are embedded in — or associated with — hedge funds.
Do CPOs Need to Register?
Technically, CPOs are a type of fund that must register with federal regulators, and under Dodd-Frank, CPOs are subject to substantial reporting requirements. Fund managers dealing with token futures must register with the CFTC and the National Futures Association — or else satisfy an exemption.
What Government Body Regulates Cryptocurrency CPO Registrations?
The Commodity Futures Trading Commission (CFTC) is responsible for regulating all commodity investing funds, including CPOs. Crypto CPOs — and other token investment structures — also fall under the purview of the CFTC because the U.S. classifies cryptocurrencies as commodities since the overwhelming majority of jurisdictions don’t accept them as legal tender.
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What’s the CFTC’s Stance on Cryptocurrencies?
It may be a regulatory agency, but the CFTC isn’t vehemently anti-crypto. In fact, the commissioners tend to support self-regulatory bodies, and they’re more token-friendly than their counterparts at the SEC. Moreover, the CFTC has fewer reporting requirements than the SEC.
Example CFTC Crypto Case: BFXNA
To date, one of the more high-profile — but by no means most costly — cases involving failure to properly register a cryptocurrency investment company focused on BFXNA, aka Bitfinex. The case dates back to 2016, and because it was one of the first, Bitfinex paid relatively few fines. These days, the damages are steep.
Why Did Bitfinex Get in Trouble with the CFTC?
Between 2013 and 2016, users of the crypto trading platform could borrow funds from other users to trade tokens on a leveraged, margined, or financed basis. However, the platform never actually delivered the coins to buyers and instead held them in escrow deposit wallets, a violation of the Dodd-Frank Act, which requires financed commodity transactions to be conducted on registered exchanges.
But exceptions exist. For example, if Bitfinex had delivered the tokens traded within 28 days, it may not have landed in legal trouble.
With What Legal Violations Did Officials Slap Bitfinex?
The CFTC filed a claim against Bitfinex for failing to register as a Futures Commission Merchant — a requirement outlined in the Commodity Exchange Act. Specifically, commissioners censured the company for “offering illegal off-exchange financed retail commodity transactions in bitcoin and other cryptocurrencies.”
Ultimately, Bitifinex paid a $75,000 fine and agreed to a host of regulatory promises.
Don’t let the low fine fool you, though. The reason it was less than $100,000 is because it was a new case category and officials were still working out the rules and parameters. Businesses slapped with similar charges today can expect to pay a lot more.
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Consult With a Cryptocurrency Lawyer in Arizona
The Kelly Law Firm works with individuals and businesses on all manners of crypto legal issues, from registration to litigation. We’re based in Arizona but work with clients across the country and around the world. Get in touch today.
