CFTC Stump questions charges against Kraken: “How would it have been expected to operate?”

Rick Steves

The CFTC Commissioner concluded that the application of the Commission’s FCM rules to an exchange on which retail commodity transactions are traded is uncharted territory at this time.

The CFTC has yesterday settled charges with San Francisco-based cryptocurrency exchange Kraken, which has agreed to pay a $1.25 million civil penalty.

The venue has allegedly illegally hosted leveraged cryptocurrency trades and failed to register as a futures commission merchant (FCM) and served as the sole margin provider and maintained physical custody of all clients’ assets.

As such, the platform operated a facility to trade cryptocurrencies without being approved as a Designated Contract Market and acted as an Eligible Contract Participants (ECP), without registering as such with the CFTC.

The CFTC found that Kraken violated CEA Section 4 because it engaged in retail commodity transactions that are prohibited by the CEA unless traded on or subject to the rules of a DCM – a registration designation that has neither been requested by nor granted to Kraken. But it also finds that Kraken operated as an unregistered FCM with respect to those transactions.

CFTC Commissioner Dawn Stump has issued a concurring statement on the matter to further explain why Kraken violated U.S. regulations and called for regulatory clarity.

The Commission’s finding that Kraken engaged in prohibited retail commodity transactions is informed by its Final Interpretive Guidance on retail commodity transactions involving certain digital assets issued in 2020, she said.

“However, as the Guidance becomes increasingly relevant to the Commission’s enforcement program, I believe it is incumbent upon the Commission to undertake a rulemaking proceeding to supersede the Guidance by adopting binding and enforceable rules that will provide certainty to the marketplace and a shared understanding of the “rules of the road”.

“I agree with his observation that “[i]n the rapidly developing world of digital assets, two years is a lifetime” – and yet now we are an additional year-and-a-half later still. I believe, therefore, that the Commission should act to replace the Guidance with rules that are based on current input from market participants and members of the public”.

In regard to the unregistered FCM finding, the Commission has long held that certain speculative commodity transactions involving leverage are futures contracts that must be traded on a designated contract market that is subject to Commission oversight.

“However, court decisions called that view into question with respect to certain leveraged transactions involving retail participants”, the CFTC Commissioner continued.

If Kraken had sought to register with the Commission as an FCM, how would it have been expected to operate?

“Absent these transactions occurring on a DCM, they would continue to be illegal even if Kraken had an FCM registration”, Commissioner Stump pointed out. ”

“Furthermore, how Kraken would be regulated as an FCM is not entirely clear, because many of the Commission’s rules governing its regulation of traditional FCMs do not fit Kraken’s role as an exchange. It also would be unprecedented for an entity to register as both a DCM and an FCM.”

The CFTC Commissioner concluded that the application of the Commission’s FCM rules to an exchange on which retail commodity transactions are traded is uncharted territory at this time.

“I believe that if the Commission is going to hold an exchange liable for operating as an unregistered FCM with respect to retail commodity transactions, it is incumbent upon the Commission to explain in a transparent manner the relevant legal requirements for such an entity that seeks to register as an FCM and how the Commission will apply them in enabling the entity to conduct business with U.S. customers”.

Read this next

Retail FX

Pepperstone adds analytics and automated trading tools free of charge

“We look forward to bringing significant value to Pepperstone traders and making a real, positive impact in their daily trading habits. We are excited to welcome them on board.”

Retail FX

FP Markets wins Best Global Value Broker for 4th consecutive year at the 2022 Global Forex Awards

“We greatly appreciate the continued international recognition as at FP Markets we pride ourselves on these attributes and these prestigious awards are testament to the hard work from our global team to always provide our clients with the ultimate trading experience.”

Inside View

How to Engage Your Customer at Every Stage of Their Journey

As many as 89% of successful businesses say that providing assistive customer experiences is critical to their growth. That’s because a mere 5% increase in customer retention can boost profits by 25% to 95%.

Industry News

CFTC fines Chinese firms Chinatex and COFCO $720,000 for wash trading

Chinatex traders engaged in wash trading in order to liquidate a long position in the account of an affiliated company and re-establish the position in its own account, to the ultimate benefit of its parent company, COFCO.

Industry News

US-based operation of Brazilian broker XP fined $500,000 for recordkeeping failures

“Proper recordkeeping is vital to protecting our markets and market participants from fraud and manipulation. This case serves as another example of the Commission’s intent to vigorously enforce the recordkeeping obligations of its registrants.”

Digital Assets

Bitfinex announces integration of USDt on Polkadot

Polkadot is the brainchild of British computer programmer and Ethereum co-founder and former CTO Gavin Wood.

Executive Moves

FPG hires ex-Fireblocks Chris Hazelton to head marketing at crypto prime broker

“Chris’s experience as a marketing leader at several exceptional businesses will help us refine our message to an institutional audience that’s overwhelmed with new information and show tangible examples of how we’ve helped customers like them scale successfully in crypto.”


FinanceFeeds Podcast Ep. #6: Gold-i’s Tom Higgins talks efficiency in FX and inner workings of Crypto Switch

On its sixth episode, the FinanceFeeds Podcast welcomed Tom Higgins, the founder and chief executive of trading systems integration provider, Gold-i.

Digital Assets

Coinigy launches Crypto Screener Tool for spot, DeFi, and derivatives

“Traders can tap into a vast dataset covering the entire crypto ecosystem, which spans nearly a decade, to identify opportunities and act quickly. This is an essential tool for all active and professional traders, including day traders.”