Judge orders CFTC to serve Ooki DAO founders with lawsuit

December 13, 2022 Coin Telegraph

CFTC

The DAO was initially served with a lawsuit via a help chat box but a federal judge said the regulator “should serve at least one identifiable Token Holder.”

A United States federal judge has ordered the Commodities Future Trading Commission (CFTC) to serve its lawsuit to the two original founders of the Ooki decentralized autonomous organization (DAO).

On Dec. 12, District Judge William Orrick ordered the U.S. regulator to serve Tom Bean and Kyle Kistner, the founders of the decentralized trading platform bZeroX which was the predecessor to Ooki DAO.

Bean and Kistner had already settled charges with the CFTC in September relating to illegal commodities offerings on bZeroX, while separate charges were laid against Ooki DAO token holders, which was served using a help chat box as well as a notice on its online forum.

However, when Judge Orrick later discovered Bean and Kistner were alsOoki DAO token holders he reconsidered how the CFTC was to serve the lawsuit.

“It seems clear in this case that Ooki DAO has actual notice of the litigation,” Judge Orrick wrote. “But to provide the best practicable notice, the CFTC should serve at least one identifiable Token Holder if that is possible.”

The CFTC’s original approach to filing the lawsuit received pushback and crypto industry participants filed amicus briefings in support of Ooki DAO which argued the CFTC should find Ooki DAO members and serve them directly with the lawsuit.

The U.S. District Court for the Northern District of California held a hearing on Dec. 7 with the CFTC and those entities who filed amicus briefs to persuade Judge Orrick to reconsider allowing the CFTC to serve Ooki DAO through its help chat box.

“At the hearing, the CFTC asserted it knew that some of Ooki DAO’s Token Holders reside and conduct business in the United States because the two founders of Ooki DAO’s predecessor entity, bZeroX LLC, are Token Holders who reside in the United States,” Orrick wrote.

“This was new information to me,” he added. “Neither the complaint nor the CFTC’s Motion for Alternative Service mention that the former founders, [Bean and Kistner], are or have been Token Holders.”

“The CFTC is now ORDERED to serve Bean and Kistner, in their roles as Ooki DAO Token Holders,” he concluded.

On Sep. 22, the CFTC settled charges against Bean and Kistner for “illegally offering leveraged and margined retail commodity transactions in digital assets” through bZeroX.

Simultaneously, it filed its lawsuit against Ooki DAO alleging it operated the same software as bZeroX after it was given into its control which violated “the same laws as the respondents.”

The CFTC was strongly criticized, even by its own people, for bringing the lawsuit without clear regulatory guidelines with CFTC commissioner, Summer Mersinger, calling it a “regulation by enforcement” approach.

US Regulator CFTC Met With Sam Bankman-Fried 10 Times Before Crypto Exchange FTX Collapsed

December 2, 2022 Bitcoin.com

US Senate committee hearing on FTX fail brings gaps in regulatory authority to light

December 1, 2022 Coin Telegraph

CFTC

CFTC chair Rostin Behnam appeared before a Senate Agriculture Committee to talk about how FTX happened and how it could have been prevented.

United States Commodity Futures Trading Commission chair Rostin Behnam told a Senate Agriculture, Nutrition, and Forestry Committee meeting Dec. 1 that his agency’s regulations contain “core elements that have served the markets for decades.” But as the fallout from the FTX collapse gets sorted out, notable gaps in current legislation have come to light, Behnam and the senators agreed.

Sen. Tina Smith called the FTX collapse “shocking, not surprising,” and said that future crises will continue to occur as long as regulatory gaps remain. Behnam pointed out that the Securities and Exchange Commission has the authority to require basic safeguards be in place, such as separation of house and customer money and best execution of investment trades.

“We know how to do this,” Behnam said. Nonetheless, he had stated in his opening remarks:

“Invariably, the questions we are all obligated to answer as regulators are: ‘How did you let this happen?’ and ‘How will you prevent this from happening again?’ […] Without new authority for the CFTC, there will remain gaps in a federal regulatory framework, even if other regulators act within their existing authority.”

Behnam has lobbied for greater authority for his agency for months. He alluded to alleged conflicts between the CFTC and SEC when he dismissed talk of a “power grab.” Interagency cooperation is not new and will continue, Behnam said. Extending CFTC authority is “about filling a gap.”

“I think the responsibilities would be the same,” between the SEC and CFTC with comprehensive regulation, and CFTC regulation works well when it is applicable.

Behnam pointed to crypto derivatives and clearing platform and FTX subsidiary LedgerX as an example of successful CFTC regulation. But, “We at the CFTC do not have the legal authority to ask about an unregulated entity,” without a whistleblower, Behnam told Sen. Tommy Tuberville. In addition, Behnam told him:

“We simply do not have the authority to register cash market exchanges […] This is the gap.”

Tuberville also pointed out that FTX had high governance marks from ratings agencies. Can they be sued, Tuberville asked. Oversight of ratings agencies is another “potential gap,” Behnam replied.

CFTC Chairman Behnam says DCCPA wouldve prevented the FTX collapse.

DCCPA would apply to a Bahamian exchange? https://t.co/5RTpBZravM
— Miller (@millercwl) December 1, 2022

Sen. Kristen Gillibrand, co-author of the Responsible Financial Innovation Act with Sen. Cynthia Lummis, told Behnam that there were “a couple of areas where I still see risk coming ahead.” Mergers and acquisitions were one such area. The CFTC paperwork to initiate the FTX acquisition of LedgerX amounted to “a notice filing” at best, Behnam conceded.

There is also a question of the impact of overseas companies on the United States and U.S entities trading offshore, Gillibrand added.

CFTC Chair Leaves Ethereum Hanging, Says Only Bitcoin Is a Commodity: Report

December 1, 2022 The Daily Hodl

Rostin Behnam points to CFTC-regulated LedgerX as success story amid FTX collapse

December 1, 2022 Coin Telegraph

CFTC

"The customer property at LedgerX — the CFTC regulated entity — has remained exactly where it should be, segregated and secure," said Rostin Behnam in a hearing on FTX's failures.

Commodity Futures Trading Commission, or CFTC, chair Rostin Behnam has cited LedgerX, the crypto derivatives and clearing platform based in the United States which was not part of FTX Group’s Chapter 11 filing, as an example of how regulating crypto firms could benefit U.S. consumers.

In a Dec. 1 hearing of the Senate Agriculture Committee exploring the collapse of FTX, Behnam said LedgerX had essentially been “walled off” from many of the companies within FTX Group — including those that filed for bankruptcy — that provided a regulatory window for the CFTC. The CFTC chair said LedgerX was “healthy”, “solvent”, and “operational” compared to other FTX entities.

“The limitations of our authority stopped at [LedgerX],” said Behnam. “For those same reasons that we were walled off from going past the regulated entity, the other FTX entities were not able to pierce through LedgerX and potentially take customer money, which obviously, as a regulator, is the priority.”

In his written testimony for the hearing, the CFTC chair said:

“Many public reports indicate that segregation and customer security failures at the bankrupt FTX entities resulted in huge amounts of FTX customer funds being misappropriated by Alameda for its proprietary trading. But the customer property at LedgerX – the CFTC regulated entity – has remained exactly where it should be, segregated and secure. This is regulation working.”

*CFTC chair Rostin Behnam addressing Senate Agriculture Committee on Dec. 1*

Behnan added that FTX had reported LedgerX held “more cash than all the other FTX debtor entities combined” in its bankruptcy filings. The CFTC chair, committee chair Michigan Senator Debbie Stabenow and ranking member Arkansas Senator John Boozman pointed to the Digital Commodities Consumer Protection Act, or DCCPA, as a potential solution to the events leading up to FTX’s insolvency, which left many U.S. consumers in the lurch.

“The crypto industry lacks the customer protections that Americans expect and deserve,” said Stabenow. “When trading in U.S. markets, when exchanges accept customer funds for trading they must not be allowed to gamble with those funds [...] FTX did all of those things, emboldened by a lack of federal oversight.”

Since filing for bankruptcy under Chapter 11 in the District of Delaware, FTX has been the target of global regulators and lawmakers investigating the exchange, including Turkey’s Financial Crimes Investigation Agency, authorities in the Bahamas and U.S. state and federal authorities. The U.S. House Financial Services Committee scheduled a hearing to investigate the events around the collapse of the crypto exchange on Dec. 13, and the next court hearing in the bankruptcy case has been scheduled for Dec. 16.

CFTC chief says Bitcoin is the only commodity in the wake of FTX collapse

December 1, 2022 Coin Telegraph

bitcoin regulation

CFTC has faced a lot of scrutiny in the wake of FTX collapse due to its ties with the crypto exchange and SBF’s efforts to put the committee as the key oversight body for crypto.

The chief of the United States Commodity Futures Trading Commission (CFTC), Rostin Behnam, claimed Bitcoin is the only crypto asset that can be viewed as a commodity during an invite-only crypto event at Princeton University, reported Fortune.

Behnam’s comments are quite a contrast to his early statements in October, where he claimed Ether (ETH) could also be viewed as a commodity. The CFTC chief was answering a question on which crypto assets should be seen as commodities and which ones qualify as securities.

The CFTC chief’s backtracking of his comments on ETH comes in the wake of heavy scrutiny of U.S regulators and accusations of corruption, with Republican lawmakers accusing the SEC chair of coordinating with FTX ‘to obtain regulatory monopoly.’

The debate over which cryptocurrencies qualify as commodities under the law has been a long-drawn one. Bitcoin is unanimously seen as non-security because of its true decentralized nature whereas the status of Ether and several other cryptocurrencies have been a controversial topic. Ripple is currently facing a security lawsuit from the SEC as well.

The American financial regulator has found itself in hot waters in the wake of the FTX crypto exchange collapse primarily because of its association with the exchange.

CFTC was poised to receive oversight capacity through proposed Senate legislation called the Digital Commodities Consumer Protection Act (DCCPA), The CFTC chief faced a lot of criticism for the same but defended the commission's actions claiming they don’t have the luxury to wait.

Behnam said the committee has limited oversight powers and blamed the “matrix of regulators” as an imperfect system. However, he called for better collaboration among the long list of regulatory bodies to come up with formidable regulations.

The CFTC chief is slated for a congressional hearing on Dec. 1, discussing the collapse of the now-bankrupt crypto exchange FTX and the lessons learned from the debacle.

Breaking: 8 Congress Members tried to stop the SEC from inquiring into FTX by questioning the SEC's authority to inquire about Crypto

5 of those 8 members also received campaign donations from FTX, ranging from $2,900 to $11,600
— Nancy Pelosi Stock Tracker ♟ (@PelosiTracker_) November 25, 2022

The close ties of former CEO Sam Bankman-Fried with US policymakers and his lobbying efforts to make CFTC the primary crypto regulatory body has been questioned by many in the crypto community. A recent report also alleged that 8 U.S. congressman tried to stop the SEC from inquiring into FTX.

EmpiresX ‘head trader’ to face 4 years of prison over $100M crypto ‘Ponzi’

December 1, 2022 Coin Telegraph

<div>EmpiresX 'head trader' to face 4 years of prison over 0M crypto 'Ponzi'</div>

CFTC

Two other associates that helped run the U.S.-based fraudulent crypto platform EmpiresX left the country early this year and are believed to be in Brazil.

One of the leading figures convicted of being behind the $100 million crypto “Ponzi” scheme, EmpiresX, has just been handed an over four-year jail sentence by a United States court.

The sentencing was handed to Joshua David Nicholas, the “head trader” of purported crypto platform EmpiresX, who is nowset to serve a 51-month prison sentence along with three years of supervised release for his role in the fraudulent scheme.

It follows a Sept. 8 guilty plea from Nicholas for conspiracy to commit securities fraud.

According to the Department of Justice (DOJ), over a two-year period, Nicholas made claims the platform would make daily “guaranteed” returns using a trading bot that utilized “artificial and human intelligence” to maximize returns.

In reality, the “bot” was fake, and Nicolas and his associates, Emerson Pires and Flavio Goncalves, operated a "Ponzi" scheme that paid earlier investors with money from later investors. The DOJ alleges blockchain analytics shows Pires and Goncalves, both Brazilian nationals, laundered investors’ funds through a “foreign-based” crypto exchange.

Only around $1 million of investor funds were sent to a futures trading account for EmpiresX with the majority of funds either lost or misappropriated according to the Commodity Futures Trading Commission (CFTC) which filed civil actions against the three in June.

At the same time, fraud charges were leveled against the trio by the Securities and Exchange Commission (SEC) which said investor money was used to “lease a Lamborghini, shop at Tiffany & Co., make a payment on a second home, and more.”

Investors were also told EmpiresX was registered with the SEC as a hedge fund and that Nicholas was a licensed trader.

The SEC said the platform was never registered with the Commission and Nicholas’ was suspended from trading by the National Futures Association for misappropriating customer funds.

The scheme ran for two years, from around September 2020 until early 2022 when it fell apart as the platform refused to honor customer withdrawals who were likely wanting to leave the crypto market due to significant price drawdowns that began at the time.

Pires and Goncalves, who were residing in Florida, allegedly began winding down the operations of EmpiresX in early 2022 and left the U.S., they are now believed to be in Brazil.

US CFTC commissioner calls for new category to protect small investors from crypto

November 30, 2022 Coin Telegraph

CFTC

Speaking the FIA meeting in Singapore, Christy Goldsmith Romero compared the typical crypto investor, who may be of modest means, with the investors the CFTC is used to.

United States Commodity Futures Trading Commission (CFTC) commissioner Christy Goldsmith Romero spoke at the Futures Industry Association Asia Derivatives Conference in Singapore on Nov. 30. She talked about “how to harness the best that technology offers, while protecting against emerging threats,” with particular emphasis on cybersecurity and crypto.

Goldsmith Romero had two proposals for protecting consumers and markets from the risks presented by cryptocurrency. The first was rather novel. “Protecting household retail investors starts with redefining who is a retail investor,” Goldsmith Romero said. Crypto investors are different, she said:

“Most are young-born after 1980, diverse, and make less than $50k a year. That is not the typical customer that the CFTC is used to seeing.”

Thus, they should not be treated the same, Goldsmith Romero reasons. “we also should not let them be crushed, which will happen without meaningful and targeted customer protections,” she said, while acknowledging the need to maintain financial inclusivity.

Goldsmith Romero suggested creating two categories of retail investor “separating household retail from professional and high net worth individuals.” After that the CFTC would provide consumer protections across that division and for each categories individually.

In traditional finance, a broker plays a role in determining the appropriateness of an investment for a consumer. In disintermediated transactions, “it is important for regulators to assess risk to customers,” she said. Moreover:

“Today, I am calling publicly for the first time for the CFTC to invoke heightened supervision of crypto exchanges. […] It is well within our existing authority for derivatives exchanges.”

The CFTC has not heeded her calls “for months” to implement that supervision, however. Goldsmith endorsed CFTC Commissioner Caroline Pham’s call for an Office of Retail Investor Advocate.

Goldsmith Romero digressed in her speech to discuss blockchain use cases unrelated to cryptocurrency. “Distributed ledger technology has the potential to prevent disease, keep food safe, limit waste, and save our agricultural industry time and money,” she said.

Goldsmith Romero was nominated for a CFTC chair by U.S. President Joe Biden in September 2021 and sworn in on March 30. She has voiced her concerns about retail investors before, and received some industry support for her proposed household retail investor category.

Sam Bankman-Fried Interview Reveals Dark Donations to Republicans, FTX’s ‘Poorly Labeled Accounting’

November 30, 2022 Bitcoin.com

US Senate committee schedules FTX hearing for Dec. 1, CFTC head to testify

November 21, 2022 Coin Telegraph

CFTC

The hearing, titled 'Why Congress Needs to Act: Lessons Learned from the FTX Collapse', will be one of the first in which U.S. lawmakers explore what happened with the exchange.

The United States Senate Agriculture Committee has announced that Commodity Futures Trading Commission, or CFTC, chair Rostin Behnam will be one of the witnesses in a hearing exploring the collapse of crypto exchange FTX.

According to the Senate Agriculture Committee website, on Dec. 1 the full committee will listen to testimony from Behnam and presumably other individuals with information about the liquidity issues and subsequent downfall of FTX. The hearing, titled ‘Why Congress Needs to Act: Lessons Learned from the FTX Collapse’ will be one of the first in which U.S. lawmakers explore what happened with the major crypto exchange and former CEO Sam Bankman-Fried.

News: On December 1 @SenateAgDems + @SenateAgGOP will hold a hearing about the FTX collapse and the need for congressional action.
— Senate Ag, Nutrition, & Forestry Committee Dems (@SenateAgDems) November 21, 2022

The U.S. House Financial Services Committee said on Nov. 16 it will be holding a similar hearing “into the collapse of FTX and the broader consequences for the digital asset ecosystem” in December, but the event did not appear in the committee’s calendar at the time of publication. The committee said it expected to hear from Bankman-Fried, Alameda Research, and Binance, but did not specifically mention testimony from federal regulators like those at the Securities and Exchange Commission or CFTC.

Lawmakers on both sides of the aisle in both chambers of Congress as well as the White House have hinted at the need for regulatory clarity or additional regulations in the wake of FTX’s collapse. On Nov. 10, White House Press Secretary Karine Jean-Pierre suggested that “prudent regulation of cryptocurrencies is indeed needed” in response to crypto firms without proper oversight.

Since filing for bankruptcy and resigning as FTX’s CEO on Nov. 11, Bankman-Fried has become the target of global regulators investigating the exchange, including Turkey’s Financial Crimes Investigation Agency, authorities in the Bahamas, and U.S. state and federal agencies. Reportedly still based in the Bahamas, Bankman-Fried may be extradited to the U.S. for questioning — it’s unclear whether he will be available to speak before either the House or Senate committee hearings.

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