LedgerX highlights CFTC regulatory gap in customer asset rules

November 4, 2023 Coin Telegraph

CFTC

The new CFTC proposal enhances rules for FCMs and DCOs, mandating high liquidity in customer fund investments.

The U.S. Commodity Futures Trading Commission (CFTC) has focused its attention on how companies handle customer assets. Nevertheless, this fresh regulation does not fully encompass the innovative model of the crypto platform LedgerX, leaving key operational aspects subject to regulatory oversight.

Regarding regulations, the recent CFTC proposal seeks to enhance the rules for futures commission merchants (FCMs) and derivative clearing organizations (DCOs). These companies are now required to invest customer funds in highly liquid assets. Nonetheless, this revision does not account for LedgerX’s unique operational model.

LedgerX operates as a DCO, establishing direct connections with clients and deviating from the conventional role of FCMs as intermediaries. This questions how the rule should adapt to encompass such groundbreaking entities.

*Screenshot of CFTC's proposed rule. Source: CFTC*

Commissioner Kristin Johnson has raised concerns, highlighting that the regulatory framework lags behind the industry’s rapid evolution. LedgerX, which was previously affiliated with FTX and is currently a part of Miami International Holdings, Inc. (MIH), operates in a unique sector by providing direct client access, deviating from established industry conventions.

Furthermore, LedgerX has garnered attention for its efforts to directly settle cryptocurrency transactions for clients, diverging from the conventional practice of involving intermediaries. The company has successfully obtained several CFTC registrations, reinforcing its operations with enhanced consumer safeguards, such as asset segregation.

Importantly, Commissioner Johnson advocates for a revised regulatory framework that would provide uniform protection for retail clients, regardless of whether they trade through intermediaries or directly with non-intermediated DCOs such as LedgerX.

This appeal for action coincides with the public being granted a 75-day window to offer feedback on the proposal. This period of contemplation and dialogue has the potential to guide the CFTC in addressing the regulatory deficiencies pointed out by Commissioner Johnson.

Hence, it becomes the responsibility of the CFTC to guarantee that regulatory measures remain aligned with the constantly changing derivatives market. This commitment is essential to protect the interests of retail customers and maintain a level and fair environment in this swiftly transforming digital financial arena.

Magazine: Deposit risk: What do crypto exchanges really do with your money?

CFTC Commissioner Says Majority of Tips in Whistleblower Program Involve Crypto

November 2, 2023 The Daily Hodl

Binance and CZ renew calls to dismiss CFTC lawsuit

October 24, 2023 Coin Telegraph

Binance

Lawyers representing the crypto exchange and its CEO claimed the CFTC was attempting to act as the "world’s derivatives police" in its lawsuit.

Lawyers representing Binance and CEO Changpeng “CZ” Zhao have filed statements in support of a motion to dismiss a lawsuit filed by the United States Commodity Futures Trading Commission (CFTC) in March.

In an Oct. 23 filing in U.S. District Court for the Northern District of Illinois, CZ’s and Binance’s attorneys made several legal claims arguing for the dismissal of the CFTC’s case against the crypto exchange. According to the legal teams, the regulator’s arguments, if accepted by the court, “would allow it to regulate any activity in cryptocurrency [...] related to a derivatives product” across the globe.

“Congress did not make the CFTC the world’s derivatives police, and the Court should reject the agency’s effort to expand its territorial reach beyond what is permitted by the law,” said the filing.

*Oct. 23 filing in U.S. District Court for the Northern District of Illinois. Source: Courtlistener*

Binance’s and CZ’s lawyers also went after each of the individual counts brought by the CFTC, arguing the regulator was “pursuing a novel theory” in an anti-evasion claim and failed to meet the standards for others. The attorneys called on the court to “dismiss the Complaint with prejudice”.

The CFTC lawsuit, first filed in March, alleged Binance failed to register with the regulator in violation of rules on derivatives trading. According to the CFTC, CZ was aware that Binance had solicited customers based in the United States, requiring the exchange to be in compliance with regulatory requirements.

Binance lawyers made a similar filing in July for dismissing the case, arguing at the time that the CFTC exceeded its regulatory authority. The crypto exchange also faces a lawsuit from the U.S. Securities and Exchange Commission filed in June.

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US Regulatory Agencies Launch Parallel Lawsuits Against Co-Founder of Bankrupt Crypto Lender Voyager

October 13, 2023 The Daily Hodl

US Commodities Regulator Mulling Enforcement Action Against Co-Founder of Bankrupt Crypto Lender Voyager: Report

October 7, 2023 The Daily Hodl

CFTC weighs enforcement action against former Voyager Digital CEO: Report

October 6, 2023 Coin Telegraph

CFTC

Following the lending firm's bankruptcy filing in July 2022, U.S. officials were reportedly considering taking action against Stephen Ehrlich for violating derivatives regulations

Officials at the United States Commodity Futures Trading Commission (CFTC) were reportedly considering an enforcement action against Stephen Ehrlich, the former CEO of crypto lending firm Voyager Digital.

According to an Oct. 6 Bloomberg report, CFTC staff were considering taking action against Ehrlich following an investigation concluding the former CEO violated U.S. derivatives regulations prior to Voyager’s bankruptcy filing. The firm filed for Chapter 11 protection in July 2022 amid the crypto market downturn.

Ehrlich was reportedly “angered and perplexed” by the claims:

“These allegations appear to be one of those times where the referees are making new rules and calling foul after the game has ended.”

Voyager, still in the middle of bankruptcy proceedings, was already under scrutiny from the U.S. Federal Trade Commission “for [its] deceptive and unfair marketing of cryptocurrency to the public”. A bankruptcy court approved Voyager’s plan to repay customers in May, and the case was ongoing at the time of publication.

The CFTC has several cases pending against crypto firms which have the potential to make waves across the U.S. regulatory space, but many of the enforcement actions in 2023 have been brought by the Securities and Exchange Commission. Binance and its CEO Changpeng Zhao have pushed for authorities to dismiss an CFTC lawsuit filed in March while many executives at Binance.US have left the exchange amid regulatory scrutiny.

Magazine: US enforcement agencies are turning up the heat on crypto-related crime

One-third of all CFTC crypto enforcement actions took place this year: Chair Behnam

October 2, 2023 Coin Telegraph

CFTC

CFTC chair Rostin Behnam told an audience at the Financial Industry Association Expo about the agency’s activity in the crypto space and its need for modern legislation.

United States Commodity Futures Trading Commission (CFTC) chair Rostin Behnam highlighted his agency’s activity in the crypto sphere and the need for up-to-date legislation at the Financial Industry Association Expo 2023 event in Chicago. He described the CFTC Enforcement Division’s efforts as a “nonstop drumbeat.”

In the text version of his keynote address to the industry group, Behnam recounted the $6 billion his agency collected in penalties in fiscal year 2023. He added:

“45 of those [enforcement] actions this fiscal year involved digital asset related misconduct, representing over 34% of the 131 such actions brought by the Commission since 2015.”

Behnam singled out the “precedent-setting litigation” his agency won against Ooki DAO, which resulted in the closure of the decentralized autonomous organization (DAO) and netted a $643,542 penalty. In its default judgment against Ooki DAO, the U.S. District Court for the Northern District of California found that the DAO was a “person” under the Commodity Exchange Act (CEA) of 1936.

Behnam returned to the CEA when he discussed the agency’s future direction. “The cornerstone of our latest era is disintermediation brought about by groundbreaking technology: DeFi, AI, and standard WiFi,” he said, but:

“The limits in the CEA established in essentially another era create real barriers to engaging in rulemakings and policy that is necessary to our mission, but just beyond our scope.”

Furthermore, those limits “forc[e] the agency to engage in increasingly resource intensive quests for assurances that we are acting within the bounds of our intended remit.”

I look forward to speaking Monday morning at @FIAconnect #FIAExpo on the @CFTC agenda and enforcement. My remarks will be posted online at https://t.co/JojHNdQoVh.
— Rostin Behnam (@CFTCbehnam) October 2, 2023

Vertical integration — an “outgrowth of electronification and the promise of DeFi” — is occurring throughout financial markets and leading to egulatory concerns, and “customer protections mean something different now,” according to Behnam.

Behnam’s statements contrasted sharply with Securities and Exchange Commission chair Gary Gensler’s position that Depression-era financial legislation “has been quite a benefit to investors and economic growth over the last 90 years,” and should not be tampered with.

Behnam also indirectly addressed limitations on the CFTC’s enforcement authority. “To suggest that […] we must wait until victims suffer and cry out for help to be proactive […] undermines our mission and purpose,” he said. “I have continued to advocate for additional authority in the crypto space,” he added later.

Magazine: Cleaning up crypto: How much enforcement is too much?

New US bill to require firms to report off-chain transactions to CFTC

September 29, 2023 Coin Telegraph

CFTC

The new legislation aims to protect crypto investors from disputes, manipulation or fraud potentially stemming from transactions occurring off-chain.

A new bill in the United States aims to require cryptocurrency service providers to report all blockchain transactions to a government repository.

On Sept. 28, U.S. Representative Don Beyer introduced the “Off-Chain Digital Commodity Transaction Reporting Act,” requiring trading platforms to report all transactions to a repository registered with the Commodity Futures Trading Commission.

The new legislation aims to protect cryptocurrency investors from disputes, manipulation or fraud potentially stemming from transactions occurring off-chain or transactions that take place beyond the blockchain network. Unlike on-chain transactions, off-chain crypto transactions are not instantly logged on a blockchain but are processed through secondary layers, thus creating some difficulties in being tracked.

With the emergence of trading platforms and a desire to increase transaction times and lower costs, thousands of transactions occur “off-chain” and are unrecorded on the publicly viewable blockchain, the announcement notes.

“Unfortunately, internal record keeping among these private entities can vary wildly, and this can leave investors and consumers vulnerable to fraud and manipulation,” Beyer wrote, adding:

“This bill is a common-sense measure to restore some transparency and confidence to the digital asset market.”

According to the bill, crypto service providers will be required to report all off-chain transactions within 24 hours to a CFTC-registered trade repository. The announcement notes that the requirements are similar to the rules for “virtually all securities and swaps transactions.”

U.S. lawmakers have been closely focused on cryptocurrency regulations recently. In mid-September, nine U.S. senators added their support to Senator Elizabeth Warren’s Digital Asset Anti-Money Laundering Act. Reintroduced in July 2023, the legislation in its current form intends to crack down on noncustodial digital wallets and extend Bank Secrecy Act responsibilities, among other legal measures, to fight the illicit use of digital money.

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Former CEO of sham crypto miner IcomTech pleads guilty of wire fraud for Ponzi scheme

September 27, 2023 Coin Telegraph

CFTC

Former IcomTech head Marco Ochoa is the latest crypto fraudster to face charges, while the CFTC charged another company and its head.

Marco Ruiz Ochoa pleaded guilty to one count of conspiracy to commit wire fraud in the Southern District Court of New York on Sept. 27 in relation to Ponzi scheme perpetrated by the IcomTech company. Ochoa was CEO of IcomTech from its founding in 2018 to 2019.

According to a statement from the United States Justice Department, IcomTech promised investors daily returns on investment products offered by the company, which purported to be a crypto mining and trading company. Promoters “hosted lavish expos” and other community events around the world to attract customers. The company also issued its own token, called an Icom.

The company allegedly did not mine crypto, however, and investors were unable to withdraw profits they saw accruing in their accounts. The company collapsed in late 2019. Charges were brought against Ochoa and other IcomTech executives in November. Ochoa faces a maximum sentence of 20 years in prison. U.S. Attorney Damian Williams said:

“Today’s guilty plea sends a clear message that we are coming after all of those who seek to exploit cryptocurrency to commit fraud.”

Ochoa’s plea came a day after Pablo Rodriguez, co-founder of the AirBit Club Ponzi, was sentenced to 12 years in prison by a different judge of the Southern District Court of New York.

CEO of cryptocurrency Ponzi scheme “IcomTech” pleads guiltyhttps://t.co/ov6BMTZ11K
— US Attorney SDNY (@SDNYnews) September 27, 2023

Also on Sept. 27, the Commodity Futures Trading Commission (CFTC) announced charges against Mosaic Exchange Limited and its CEO Sean Michael. Mosaic Exchange allegedly lured investors to allow it to enter into “futures, swaps, and leveraged spot transactions in cryptocurrency” on their behalf. CFTC commissioner Kristin Johnson said in a statement on the charges:

“Mosaic was able to trade digital asset derivatives on BitMEX and Binance, two platforms that the CFTC has previously charged with, among other things, failing to register as an FCM [futures commission merchant], SEF [swap execution facility], or DCM [designated contract market], and failing to implement anti-money laundering and know-your-customer procedures.”

“In accordance with our existing authority, the CFTC should begin introducing regulation to address gaps that may exist in these novel market structures,” she continued.

Magazine: Deposit risk: What do crypto exchanges really do with your money?

Binance CEO responds to rumors, says US executive is ‘taking a deserved break’

September 15, 2023 Coin Telegraph

Binance

Despite Brian Shroder resigning as CEO of the exchange’s US wing amid SEC and CFTC lawsuits, Binance CEO Changpeng Zhao claimed that the departure was normal.

Binance Holdings CEO Changpeng Zhao (CZ) has shot down speculation surrounding the departure of Binance.US CEO Brian Shroder, noting that he is “taking a deserved break" after a successful stint at the company.

Binance.US is a subsidiary of Binance Holdings, and the U.S. based exchange has seen a handful of other top executives recently step down from the firm amid lawsuits from the Securities and Exchange Commission and Commodities Futures Trading Commission.

In a Sept. 15 statement via X (Twitter), CZ urged people to "ignore FUD" around the recent shuffling of execs, as he suggested that Shroder was leaving the firm amicably after accomplishing everything he "set out to do when he joined two years ago."

"Under his leadership, Binance.US raised capital, improved its product and service offerings, solidified internal processes, and gained significant market share, all of which helped to build a more resilient company for the benefit of customers. We are grateful for his contributions," CZ said.

There has been some speculation regarding recent management changes at @BinanceUS. Brian Shroder is taking a deserved break after accomplishing what he set out to do when he joined two years ago. Under his leadership, https://t.co/hSHrrlF7o7 raised capital, improved its product…
— CZ Binance (@cz_binance) September 15, 2023

Binance is facing lawsuits from both the SEC and CFTC over several alleged violations of SEC and CFTC laws, including the alleged sale of unregistered securities and mishandling of customer funds. As part of its lawsuit, the SEC claimed that the US and international branches of Binance have illegally commingled funds between each other.

In the midst of this lawsuit, Binance.US announced on September 13 that it was laying off a third of its staff and that Shroder was leaving his position as CEO. On September 14, an additional two executive departures were reported as both head of legal Krishna Juvvadi and chief risk officer Sidney Majalya decided to quit the company. The departures fueled speculation on Twitter that Binance may be facing worse legal troubles than previously understood.

Seemingly referencing the lawsuits in his X post, CZ also asserted that the crypto market “is in a different place now than it was two years ago,” as crypto firms face an “increasingly hostile regulatory environment.” In his view, the new CEO for Binance.US, Norman Reed, is the “right person” to lead the US exchange in this new era.

Binance is the largest crypto exchange by volume in the world. It has come under increasing criticism since the third-largest exchange, FTX, went bankrupt in November and FTX executives were charged with fraud. Critics say that Binance has not been transparent enough about its business practices and has not proven that it is solvent. However, CZ has brushed off these concerns, stating that the firm has “no liquidity issues” and that claims against it are unfounded.

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