CFTC Takes First Action Against Virtual Currency Options Trading Platform

On Thursday, Sept. 17, 2015, the U.S. Commodity Futures Trading Commission (CFTC) issued an Order against San Francisco-based Coinflip and its chief executive officer, Francisco Riordan, to resolve allegations that Coinflip conducted activity related to commodity options transactions without complying with the Commodity Exchange Act (CEA) and CFTC Regulations.

Specifically, the CFTC alleged that Coinflip operated a facility for the trading or processing of commodity options without complying with the CEA or CFTC Regulations otherwise applicable to swaps or conducting the activity pursuant to the CFTC’s exemption for trade options. Coinflip and Mr. Riordan, without admitting or denying the findings and conclusions contained in the Order, consented to the CFTC’s entry of the Order and agreed to cease and desist their activities as an unregistered facility.

This case is significant in that it is the first CFTC enforcement action against a virtual currency options trading platform, and because the CFTC appears to be definitively asserting jurisdiction over digital currency. It is also a continuation of the government’s efforts to regulate online options and swaps, following on the heels of the SEC’s action in the matter of Sand Hill Exchange.1

The Order states that the CFTC found that, from March 2014 to at least August 2014, Coinflip and Riordan operated Derivabit, an online facility that offered to connect buyers and sellers of bitcoin option contracts. The CFTC found that Derivabit offered commodity option contracts and swaps on its platform even though it was not registered to do so with the CFTC. The CFTC requires online facilities offering commodity option transactions or swaps to be registered with the agency.

Notably, the Order states that virtual currencies such as bitcoin fall within the definition of “commodity” for purposes of the CEA. The agency had previously announced its opinion that virtual currencies could be considered commodities; this is the first time the agency has taken official action based on that opinion. Other than the general conclusion that virtual currency falls within definition of a commodity, the CFTC offers no explanation or analysis of how virtual currencies are encompassed within that definition.

The CFTC found that that Coinflip and Riordan violated Sections 4c(b) and 5h(a)(1) of the Act and Commission Regulations 32.2 and 37.3(a)(1) by conducting activity related to commodity options contrary to these regulations and by operating an unregistered facility for the trading or processing of swaps.

Aitan Goelman, the CFTC’s Director of Enforcement, commented: “While there is a lot of excitement surrounding Bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets.”

1Goodwin Procter LLP represented Sand Hill Exchange and its founders in this matter, SEC v. Sand Hill Exchange, et al.