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CFTC Annual Enforcement Report Highlights Digital Asset Actions
Practical Law Legal Update w-037-4823 (Approx. 5 pages)
CFTC Annual Enforcement Report Highlights Digital Asset Actions
by Practical Law Finance
| Published on 10 Nov 2022 • USA (National/Federal) |
The CFTC's Division of Enforcement (DOE) issued a report outlining its 2022 enforcement efforts, with an emphasis on enforcement actions involving digital asset related conduct.
On October 20, 2022, the CFTC's Division of Enforcement (DOE) issued a summary of its fiscal year 2022 enforcement activity with an emphasis on actions involving digital asset related conduct. In an addendum to the report, DOE provides the following list of all 82 enforcement actions taken in fiscal year 2022, by category:
- Conduct related to digital assets: 18 actions.
- Manipulative conduct, false reporting, or spoofing: seven actions.
- Fraud: 31 actions with 15 of these actions also including failure-to-register charges and three of these actions also including false statements to either the CFTC or a self-regulatory organization (SRO).
- Supervision, financial integrity, or business conduct: seven actions.
- Illegal off-exchange contracts or failure to register: 12 actions.
- Trade practice violations (including wash trades, fictitious trades, and position limits): two actions.
- Reporting and recordkeeping: 18 actions with 15 of these actions also including failure-to-supervise charges.
- Misappropriation of material, non-public, confidential information, or misconduct by employees against their employers: three actions.
- False information to the CFTC or an SRO or violation of prior order: one action.
- Statutory disqualification: one action.
The CFTC noted that it imposed over $2.5 billion in restitution, disgorgement, and civil monetary penalties in 2022 either through settlement or litigation.
Digital asset actions. The report highlights the following actions related to digital assets:
- Gemini Trust. This registered designated contract market (DCM) was charged with making false or misleading statements of material fact or omitting to state material facts to the CFTC during an evaluation of the potential self-certification of a bitcoin futures contract (see Legal Update, Digital Asset Platforms Binance and Gemini Face New Legal and Regulatory Challenges).
- bZeroX LLC/Ooki DAO. Respondents who designed, deployed, marketed, and made solicitations concerning a blockchain-based software protocol that accepted orders for and facilitated margined and leveraged retail commodity transactions (functioning similarly to a trading platform) were found by the CFTC to have engaged in activities that could only lawfully be performed by a registered futures commission merchant (FCM). The CFTC also found that respondents failed to adopt a customer identification program as part of a Bank Secrecy Act (BSA) compliance program required by FCMs (see Legal Update, CFTC Charges Ooki with Failure to Register as FCM, Finds Members Personally Liable for DAO's Debts).
- Bitfinex/Tether. The CFTC charged cryptocurrency trading platform Bitfinex with engaging in illegal, off-exchange retail commodity transactions in digital assets with US persons and operating as an unregistered FCM. The CFTC charged Tether with making untrue or misleading statements and omissions of material fact in connection with its Tether stablecoin. The CFTC settlement required Tether to pay a civil monetary penalty of $41 million (see Legal Update, CFTC Settles Charges Against Stablecoin Issuer Tether and Related Crypto Platform Bitfinex for CFTC Violations).
Recordkeeping and supervision actions. DOE reported enforcement actions involving 12 financial institutions resulting in the imposition by the CFTC of a total of $796 million in civil monetary penalties where the CFTC found that the swap dealer and FCM affiliates of these financial institutions committed recordkeeping and supervision violations (see Legal Update, CFTC and SEC Order Financial Institutions to Pay $1.8 Billion for Recordkeeping and Supervision Failures).
Supervision, financial integrity, and business conduct actions. Among the seven actions brought against registered entities for these rule violations, DOE noted that the CFTC found that a financial trading platform and registered DCM CX Futures Exchange, L.P., committed multiple violations including options and swaps reporting violations and violations of a DCM core principle relating to the reliability, security, and adequate scalable capacity of operations and automated systems (see Legal Update, CFTC Fines Financial Trading Platform $6.5 Million for Alleged Reporting and Cybersecurity Risk Assessment and Testing Failures).
Other enforcement actions on fraud, registration, reporting, wash trading, and position limit violations. DOE noted the following additional 2022 enforcement actions:
Fraudulent conduct. The CFTC charged hedge fund Archegos Capital Management (ACM) and its CFO with engaging in a scheme to provide false or misleading material information resulting in the swap counterparties of Archegos Fund, LP, a private fund managed by ACM, collectively losing over $10 billion.
Failure to register as an FCM. The CFTC filed five enforcement actions charging five entities with operating as unregistered FCMs.
Multimillion dollar forex fraud. The CFTC filed a complaint alleging defendants defrauded 14,0000 retail forex customers worldwide and misappropriated at least $4.7 million of customer funds.
Wash trading and position limit violations. The CFTC issued an order filing and settling charges of wash trading violations, position limit violations, and reporting failures.