The Commodity Futures Trading Commission ("CFTC") continues to push an aggressive enforcement regime against participants in the steadily growing digital asset markets. In recent weeks, the CFTC has published separate speaking order settlements against major institutions involved in digital asset markets, including Tether, Kraken and Bitfinex.1 Importantly, these settlements demonstrate a long term trend at the CFTC to pursue enforcement actions in the digital asset markets because the investigations associated with these settlements appear to originate from prior CFTC administrations.
These settlements also bring to light the complicated web of CFTC jurisdiction over the commodities markets. The Tether settlement highlights the CFTC's limited jurisdiction to pursue fraud and manipulation in the commodities market. Importantly, the Tether settlement also represents the first CFTC settlement addressing a so-called stablecoin, and serves to lay down a marker that the CFTC considers one of the major stablecoins in the digital asset market to be a commodity under the CFTC's jurisdiction rather than a security regulated by the Securities and Exchange Commission ("SEC"). On the other hand, both the Kraken and Bitfinex settlements showcase the CFTC's jurisdiction to regulate fully certain retail commodity transactions that trade on margin.
In total, these enforcement actions resulted in penalties amounting to approximately $43.75 million, with the Tether settlement representing nearly all of the total amount at $41 million.2
Tether Settlement
In 2014, Tether introduced a stablecoin called the U.S. dollar tether token ("USDt"), which is pegged to the U.S. dollar.3 The CFTC defined a "stablecoin" as a type of virtual currency whose value is derived from a fiat currency.4 Although Tether offered a number of tether tokens, the dominant offering was the USDt. In reaching its decision in the Tether Order, the CFTC determined that stablecoins, like those offered by Tether, fall within the definition of a "commodity" under the CEA on the basis that courts have ruled that digital currencies fall within the definition of a commodity.5
Since 2014, Tether "represented that one USDt may always be redeemed for one U.S. dollar."6 Prior to November 2017, USDt could only be acquired and redeemed through Tether's platform. At some point in November 2017, Tether's systems were the target of a cyber-attack which resulted in the unauthorized transfer of nearly 31 million units of USDt. For a period of time following the cyber-attack, Tether ceased issuing and redeeming USDt, and tokens could be acquired or redeemed only through Tether's affiliate, Bitfinex. Since November 2018, USDt could be acquired from either Tether or Bitfinex, among a number of other cryptocurrency exchanges.7
In the Tether Order, the CFTC alleged that since introducing the currency in 2014, Tether made numerous public representations that the USDt, as well as its other tether tokens, were directly linked to fiat currency. One such assertion, in the form of a whitepaper published on Tether's website, stated that "[e]ach Tether issued into circulation will be backed in a one-to-one ratio with the equivalent amount of corresponding fiat currency held in reserves by Hong Kong-based Tether Limited."8 Another statement, made in the context of a newly announced banking relationship, affirmed that the "[USDt] in the market are fully backed by US dollars that are safely deposited in [Tether's] bank accounts."9
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Footnotes
1. In re Tether Holdings Limited, et al., Order Instituting Proceedings Pursuant to Sections 6(c) and (d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, CFTC Docket No. 22-4 (Oct. 15, 2021) ("Tether Order"); In re Payward Ventures, Inc. (d/b/a/ Kraken), Order Instituting Proceedings Pursuant to Sections 6(c) and (d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, CFTC Docket No. 21-20 (Sept. 28, 2021) ("Kraken Order"); In re iFinex Inc., et al., Order Instituting Proceedings Pursuant to Sections 6(c) and (d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, CFTC Docket No. 22-05 (Oct. 15, 2021) ("Bitfinex Order").
2. In the Tether Order, Tether was issued a civil penalty of $41 million. In the other orders, Kraken and Bitfinex were issued a civil penalties of $1.25 million and $1.5 million, respectively.
3. The following entities are collectively referred to herein as "Tether": Tether Holdings Limited, Tether Operations Limited, Tether Limited, and Tether International Limited.
4. Tether Order at 3.
5. Tether Order at 8 ("Digital assets are commodities. . . . The USDt token, a virtual currency stablecoin, is a commodity and subject to the applicable provisions of the Act and Regulations."); see also CFTC v. McDonnell, 287 F. Supp. 3d 213, 217 (E.D.N.Y. 2018); CFTC v. My Big Coin Pay, Inc., 334 F. Supp. 3d 492, 495–98 (D. Mass. 2018).
6. Tether Order at 3.
7. Id. at 4.
8. Id.
9. Id. at 5.
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