CFTC Treats Bitcoin as Commodity, Orders Exchange to Cease Trading

The U.S. Commodity Futures Trading Commission (CFTC) today ordered a bitcoin options trading platform to cease “illegally offering bitcoin options”.

It is the first action by the CFTC against a bitcoin options trading platform. The CFTC concludes that it has jurisdiction as it holds that bitcoin and other digital currencies are a commodity covered by the US Commodity Exchange Act (CEA).

The CFTC filed and simultaneously settling charges against Coinflip, Inc. and its chief executive officer Francisco Riordan for trading commodity options without complying with the Commodity Exchange Act (CEA) and CFTC Regulations, specifically, by operating a facility for the trading or processing of commodity options without complying with the CEA or CFTC regulations. Coinflip is based in San Francisco, California, and Riordan resides in San Francisco.

From March 2014 to at least August 2014, Coinflip and Riordan operated an online trading platform called Derivabit, offering to connect buyers and sellers of Bitcoin option contracts.

The Order requires Coinflip and Riordan to cease and desist from further violations of the CEA and Regulations, as charged, and to comply with specified undertakings.

Aitan Goelman, the CFTC’s Director of Enforcement, commented:

While there is a lot of excitement surrounding Bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets.

The CFTC Order finds that Coinflip designated put and call options for the delivery of bitcoins as eligible for trading on the Derivabit platform. Under Section 4c of the CEA and Part 32 of the CFTC’s Regulations, commodity option transactions must either be conducted in compliance with provisions of the CEA or Regulations otherwise applicable to swaps, or conducted pursuant to Regulation 32.3, the “trade option” exemption. In the Order, the CFTC for the first time finds that “bitcoin and other virtual currencies are properly defined as commodities.” The CFTC Orders also determines that the activities related to commodity option transactions were not conducted in compliance with a provision of the CEA or a provision of the Regulations otherwise applicable to swaps, and were not conducted pursuant to the Regulation 32.3 “trade option” exemption. Additionally, the Order finds that Coinflip operated a facility for the trading of swaps but did not register the facility as a Swap Execution Facility or Designated Contract Market, as required. The CEA’s definition of “swap” includes option contracts. Accordingly, Coinflip violated Section 5h(a)(1) of the CEA and Regulation 37.3(a)(1).

The Derivabit.com platform no longer appears to be operating, while Coinflip still has a LinkedIn page.

The CFTC’s finding that bitcoin and other digital currencies are commodities further complicates things for bitcoin investors as the IRS in March 2014 determined that bitcoin should be treated as property rather as a currency.

Leave a Reply