CFTC does not regulate Coinbase, says Commissioner

Rick Steves

“Let me be very clear: I do not condone the conduct that the Commission finds Coinbase and its former Employee A to have engaged in. My point in writing is not to defend Coinbase. Rather, it is to voice my concern about the implications of today’s action for the trading public, the American taxpayer, and the Commission’s priorities”, the CFTC Commissioner stated.

CFTC Commissioner Dawn D. Stump has commented on the case against Coinbase and while, concurring with the regulator’s findings, she expressed her “serious concerns about the Commission’s dedication of resources to this matter involving an exchange for cash transactions in digital assets”.

The Commissioner agrees that Coinbase is liable for reporting false trading information and for wash trading performed by a former employee, but the CFTC does not regulate cryptocurrency exchanges, she argues.

“Coinbase has not offered any futures contract, option, or swap (collectively, “derivatives products”) regulated by the CFTC;
As a result, Coinbase is not required to register with, and is not regulated by, the CFTC;
Coinbase’s activities concerning the digital assets at issue did not affect the trading of any listed derivatives product regulated by the CFTC because there were no listed derivatives products on digital assets traded at that time; and
The settled charges are based largely on conduct that is several years old, has not been repeated, and in the case of the charge of secondary liability, is based on conduct by an employee who left Coinbase years ago and who is not being charged.”

The CFTC must maintain its focus and be clear with the public that it does not supervise cash digital asset exchanges like Coinbase nor any other cash commodity transaction, be they for corn or oil.

“Coinbase is a cash market that has never offered any derivatives products, and thus falls outside the scope of the CFTC’s regulatory authority under the CEA”, she argued, adding that it is unfortunate that today’s settlement Order fails to be clear about that.

CFTC Commissioner Dawn D. Stump goes on to argue that the CFTC cannot be a full-time “cop on the beat” although the CFTC has been granted with “certain limited enforcement authorities with respect to cash commodity markets, and those authorities were expanded to some degree by the Dodd-Frank Act”.

This limited authority (anti-fraud/manipulation/false reporting, as opposed to day-to-day regulatory oversight) is a tool to assist in its primary function of regulating derivatives products. Cash market transactions can potentially be part of a scheme to manipulate prices of derivatives products that are regulated by the CFTC, and thus the CEA provides the CFTC with limited enforcement authorities with respect to cash transactions.

“Let me be very clear: I do not condone the conduct that the Commission finds Coinbase and its former Employee A to have engaged in. My point in writing is not to defend Coinbase. Rather, it is to voice my concern about the implications of today’s action for the trading public, the American taxpayer, and the Commission’s priorities”, the CFTC Commissioner stated.

Commissioner Dawn D. Stump concluded that the unique challenges presented by the phenomenal growth of digital assets and exchanges require the entire community of regulators to clearly convey the scope of their role. Also, the CFTC should consider the priority it attaches to unregulated cash digital asset exchanges in its enforcement efforts.

FinanceFeeds has recently reported on the $6.5 million settlement between Coinbase and the CFTC. Coinbase was found liable for false reporting of trading data, which may have misled the wider crypto market in its price discovery and perception of liquidity.

The operator was also charged for being “vicariously liable as a principal” for a former employee’s conduct, who performed wash trading in the Litecoin/Bitcoin trading pair on GDAX.

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