CFTC Issues Order Against Offshore Crypto Firm Falcon Labs for Providing US Customers Access to Digital Asset Derivatives Trading Platforms | Practical Law

CFTC Issues Order Against Offshore Crypto Firm Falcon Labs for Providing US Customers Access to Digital Asset Derivatives Trading Platforms | Practical Law

The CFTC issued an order simultaneously filing and settling charges against Falcon Labs, Ltd., an entity organized under the laws of the Seychelles, for failing to register with the CFTC as a futures commission merchant (FCM), as required. This marks the CFTC's first action against an unregistered FCM that inappropriately facilitated access to digital asset exchanges.

CFTC Issues Order Against Offshore Crypto Firm Falcon Labs for Providing US Customers Access to Digital Asset Derivatives Trading Platforms

by Practical Law Finance
Published on 14 May 2024 • USA (National/Federal)
The CFTC issued an order simultaneously filing and settling charges against Falcon Labs, Ltd., an entity organized under the laws of the Seychelles, for failing to register with the CFTC as a futures commission merchant (FCM), as required. This marks the CFTC's first action against an unregistered FCM that inappropriately facilitated access to digital asset exchanges.
On May 13, 2024, the CFTC issued an order simultaneously filing and settling charges against Falcon Labs, Ltd., an entity organized under the laws of the Seychelles, for failing to register with the CFTC as a futures commission merchant (FCM), as required. This marks the CFTC's first action against an unregistered FCM that inappropriately facilitated access to digital asset exchanges.
According to the order, from approximately October 2021 through at least March 27, 2023, Falcon Labs solicited or accepted orders for digital asset derivatives from customers located in the US. Throughout this period, Falcon Labs functioned as an intermediary facilitating customer trading on various digital asset exchanges, including institutional customers located in the US. Falcon Labs provided its customers with direct access to exchanges by first creating a main account in its own name and then creating associated sub-accounts. The exchanges generally did not require, and Falcon Labs generally did not provide, customer-identifying information for the sub-account holders.
The order finds Falcon Labs collected net fees of approximately $1,179,008 from customers entering into digital asset derivative transactions intermediated by Falcon Labs. As recognized in the order, Falcon Labs voluntarily improved its controls for identifying the location of its customers after the CFTC filed its complaint against Changpeng Zhao, Binance Holdings Limited, Binance Holdings (IE) Limited, Binance (Services) Holdings Limited, and Samuel Lim, which alleged in relevant part that prime brokers opened "sub-accounts" through which US-located customers traded digital asset derivatives on the Binance platform (see CFTC Press Release No. 8680-23 and Legal Update, CFTC Charges Major Crypto Exchange Binance and Its CEO with Numerous Violations).
Falcon Labs is ordered to cease and desist from acting as an unregistered FCM and to pay $1,179,008 in disgorgement and a $589,504 civil monetary penalty. The reduced civil monetary penalty reflects Falcon Labs’ substantial cooperation with the CFTC’s Division of Enforcement, as detailed in the order.
CFTC Commissioner Caroline D. Pham issued a concurring statement noting her view that:
  • The CFTC's interpretation in the order is unprecedented and constitutes a legislative rule that requires notice-and-comment rulemaking pursuant to the Administrative Procedure Act (APA) because it may impose new CFTC registration and trading requirements on scores of non-US legal entities.
  • The CFTC has chosen to ignore its comprehensive cross-border regulatory regime in favor of a new “U.S. location” test for extraterritorial application of the Commodity Exchange Act (CEA) to “look through” non-US legal entities in the latest of a series of precedents that undermines the legitimacy of the CFTC and the integrity of global derivatives markets.