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CFTC Settles Charges Against Stablecoin Issuer Tether and Related Crypto Platform Bitfinex for CFTC Violations
Practical Law Legal Update w-033-0360 (Approx. 6 pages)
CFTC Settles Charges Against Stablecoin Issuer Tether and Related Crypto Platform Bitfinex for CFTC Violations
by Practical Law Finance
| Published on 18 Oct 2021 • USA (National/Federal) |
The CFTC filed and settled charges against stablecoin issuer Tether for making untrue or misleading statements in connection with its US dollar Tether token and against crypto trading platform Bitfinex for failing to register as a futures commission merchant (FCM), as well as for violation of a prior a CFTC order. This is the first action in which the CFTC has applied the broad definition of commodity under the Commodity Exchange Act (CEA) to a stablecoin.
On October 15, 2021, the CFTC filed and settled charges against:
- Tether Holdings Limited, a British Virgin Islands corporation, Tether Operations Limited, a Hong Kong corporation, Tether Limited, a British Virgin Islands corporation, and Tether International Limited, a British Virgin Islands corporation, each doing business as Tether (collectively, Tether respondents) for making untrue or misleading statements and omissions of material fact in connection with Tether (USDt), its US dollar stablecoin (see CFTC Tether Order).
- iFinex Inc., BFXNA Inc. (BFXNA), and BFXWW Inc., each incorporated in the British Virgin Islands and doing business as Bitfinex (collectively, Bitfinex respondents) for failing to register as a futures commission merchant (FCM) and violating a prior CFTC order (see CFTC Bitfinex Order).
This is the first action in which the CFTC has applied the broad definition of commodity under the Commodity Exchange Act (CEA) to a stablecoin. Note that CFTC Commissioner Dawn D. Stump issued a concurring statement regarding the Tether and Bitfinex settlements (see CFTC Commissioner Issues Concurring Statement).
In connection with these enforcement actions, the CFTC urges the public to verify a company's registration status with the CFTC before committing funds and if it is unregistered, a customer should be wary of providing funds to that entity. A company's registration status can be found using NFA BASIC.
In February 2021, the New York Attorney General (NYAG) reached a settlement with Tether and Bitfinex in connection with an investigation into allegations that Tether misrepresented the degree to which its cryptocurrency was backed by fiat currency (see Legal Update, New York Attorney General Settles with Bitfinex and Tether for Crypto Violations, Brings Unregistered Token Action Against Coinseed).
CFTC Tether Order
The CFTC filed and simultaneously settled charges against the Tether respondents under an order (Tether order) for violations of Section 6(c)(1) of the CEA and CFTC Regulation 180.1(a)(2) by making untrue or misleading statements of material facts in connection with Tether. According to the Tether order, during the relevant period from June 1, 2016 to February 25, 2019, the Tether respondents:
- Falsely represented that the Tether token is a stablecoin with its value pegged to a fiat currency that is 100% backed by corresponding fiat assets, including US dollars and euros.
- Falsely represented to customers and the market that Tether maintained sufficient US dollar reserves to back every USDt in circulation with an equivalent amount of fiat currency held by Tether that was being safely held in Tether’s bank accounts.
- Failed to disclose that it included unsecured receivables and non-fiat assets in its reserves.
- Falsely represented that it would undergo routine, professional audits to demonstrate that it maintained 100% reserves at all times even though Tether reserves never fully audited.
The Tether order observes that Tether Limited was and continues to be registered with Financial Crimes Enforcement Network (FinCEN) as a nonbank financial institution known as a money services business (MSB) but that none of the Tether entities has ever been registered with the CFTC in any capacity.
Without admitting or denying the findings and conclusions under the Tether order, the Tether respondents have agreed to:
Pay a $41 million civil monetary penalty within 10 days of the date of the order.
Cease and desist from further violations of the CEA and CFTC regulations, as charged.
The Tether order notes that the Tether respondents and Bitfinex shared common ownership, leadership, management, employees, operational resources, and common business functions such as marketing, audit, legal, compliance, finance, tech and support resources.
CFTC Bitfinex Order
The CFTC filed and simultaneously settled charges against the Bitfinex respondents under an order (Bitfinex order) for violation of the CEA. According to the order, the Bitfinex respondents:
- Offered, entered into, executed, and confirmed the execution of illegal, off-exchange financed retail commodity transactions with US persons that were not eligible contract participants (ECPs) or eligible commercial entities in violation of Section 4(a) of the CEA.
- Continued to offer, confirm the execution of, and receive funds for financed retail commodity transactions that were not made on or subject to the rules of a board of a trade that has been designated or registered by the CFTC as a contract market.
- operated as an unregistered FCM in violation of Section 4d(a)(1) of the CEA when it accepted orders for and acted as a counterparty to retail commodity transactions with customers, and accepted money or property, including bitcoin and other cryptocurrencies, to margin these transactions.
In addition, according to the Bitfinex order, BFXNA also violated a prior CFTC order entered in In re BFXNA Inc. d/b/a Bitfinex (CFTC No. 16-19, (June 2, 2016)) (2016 BFXNA order), which directed BFXNA to cease and desist from violating Sections 4(a) and 4d of the CEA (see Article, Blockchain Technology and Regulatory Investigations: Regulation of Blockchain Activities).
According to the Bitfinex order, during the relevant period, BFXNA repeatedly violated Section 4(a) of the Act CEA, CFTC Regulations, and the BFXNA order when BFXNA:
- Offered to enter into, executed, or confirmed the execution of leveraged, margined, or financed retail commodity transactions without being subject to the rules of a board of trade that had been designated or registered by the CFTC as a contract market.
- Accepted orders for retail commodity transactions and received funds from customers in connection with those transactions while not registered with the CFTC in any capacity.
The Bitfinex order observes that none of the Bitfinex respondents have ever been registered with the CFTC in any capacity.
Without admitting or denying the findings and conclusions in the Bitfinex order, the Bitfinex respondents have agreed to:
Pay a $1.5 million civil monetary penalty within 10 days of the date of the order plus any accrued post-judgment interest.
Cease and desist from further violations of the CEA and CFTC regulations.
In connection with the Bitfinex order, the Bitfinex respondents also agreed to comply with certain undertakings required by the CFTC by December 31, 2021, including implementation and maintenance of enhanced systems and procedures reasonably designed to prevent non-ECP US persons from engaging in retail commodity transactions on the Bitfinex platform.
CFTC Commissioner Stump Issues Concurring Statement
CFTC Commissioner Dawn D. Stump issued a concurring statement to the Tether and Bitfinex settlement because this the first time the CFTC has applied the CEA’s broad definition of “commodity” to a stablecoin. The commissioner wished to reiterate her concerns that enforcement actions such this matter involving digital assets may cause confusion about the CFTC’s role in this area. The commissioner questioned, among other things, whether the CFTC is providing users of stablecoins with a false sense of comfort that the CFTC is overseeing those who issue and sell these coins such that the users are protected from wrongdoing.