- INTRODUCTION
The Commodity Futures Trading Commission (“Commission”) has reason to believe that from at least March 1, 2016 through at least December 31, 2018 (the “Relevant Period”) Respondents iFinex Inc. (“iFinex”), BFXNA Inc. (“BFXNA”), and BFXWW Inc. (“BFXWW”) all doing business as “Bitfinex” (collectively, “Respondents” or “Bitfinex”), violated Sections 4(a) and 4d of the Act, 7 U.S.C. §§ 6(a) and 6d (2018); and that BFXNA further violated Part VII. A of the Commission’s 2016 Order in In re BFXNA Inc. d/b/a Bitfinex, CFTC No. 16-19, 2016 WL 3137612 (June 2, 2016) (“2016 Order”), which directed BFXNA to cease and desist from violating Sections 4(a) and 4d, as Bitfinex has continued to offer, confirm the execution of, and receive funds for financed retail commodity transactions that were not made on or subject to the rules of a board of a trade that has been designated or registered by the CFTC. Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted to determine whether Bitfinex engaged in the violations set forth herein and to determine whether any order should be issued imposing remedial sanctions.
In anticipation of the institution of an administrative proceeding, Respondents have submitted an Offer of Settlement (“Offer”), which the Commission has determined to accept. Without admitting or denying any of the findings or conclusions herein, Respondents consent to the entry of this Order Instituting Proceedings Pursuant to Section 6(c) and (d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions (“Order”), and acknowledges service of this Order.
- FINDINGS
The Commission finds the following:
- SUMMARY
During the Relevant Period and continuing to the present day, Respondents have offered spot and leveraged, margined, or financed trading in various digital assets including bitcoin, ether, and tether tokens. Throughout the Relevant Period, Respondents have offered, executed, and/or confirmed the execution of off-exchange leveraged, margined, or financed transactions with U.S. customers who were not eligible contract participants or eligible commercial entities (collectively, “non-ECPs” or “retail customers”), in violation of Section 4(a) of the Act, 7 U.S.C. § 6(a) (2018). Respondents have also accepted fiat currency, bitcoin, U.S. dollar tether tokens (“USDt”), and other cryptocurrencies in connection with the aforementioned retail commodity transactions. By accepting funds and orders for retail commodity transactions, Respondents also operated as a futures commission merchant (“FCM”) without obtaining the required registration in violation of Section 4d(a)(1) of the Act, 7 U.S.C. § 6d(a)(1) (2018).
On June 2, 2016, the Commission entered an administrative order finding that from in or about April 2013 to at least February 2016, BFXNA had violated the then-effective Sections 4(a) and 4d of the CEA, and ordering BFXNA to cease and desist from the violations as charged. See 2016 Order. By continuing to offer, execute, and/or confirm the execution of retail leveraged, margined, or financed commodity transactions that were not made on or subject to the rules of a board of trade that has been designated or registered by the CFTC as a contract market for the specific commodity, and by accepting funds and orders for those transactions, throughout the Relevant Period, BFXNA, has also violated Part VII. A of the 2016 Order.
- RESPONDENTS
iFinex Inc. was incorporated in the British Virgin Islands on May 21, 2013. iFinex operates the Bitfinex trading platform. iFinex has never been registered with the Commission in any capacity.
BFXNA Inc. was incorporated in the British Virgin Islands on November 4, 2014. BFXNA is a wholly-owned subsidiary of iFinex. According to Bitfinex’s Terms of Service (“TOS”), U.S. persons and individuals who make deposits, withdrawals, or transfers through U.S. financial institutions are BFXNA’s customers. BFXNA has been registered as a money service business (“MSB”) with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury since January 30, 2015. BFXNA has never been registered with the Commission in any capacity.
BFXWW Inc. was incorporated in the British Virgin Islands on April 28, 2015. BFXWW is a wholly-owned subsidiary of iFinex. According to Bitfinex’s TOS, BFXWW contracts with non-U.S. customers. BFXWW has never been registered with the Commission in any capacity.
- FACTS
Bitfinex offers trading of cryptocurrency products, including bitcoin, ether, litecoin, and tether tokens, to customers on its website, www.bitfinex.com, the Bitfinex mobile application, and by direct connection to its trading engine servers via the Bitfinex application programming interface.
Bitfinex offers trading on a leveraged or margined basis on both long and short positions. The amount of initial equity Bitfinex requires that a customer have in order to trade on margin varies by product. For example, for the BTC/USD pair, the maximum leverage for margin trading is 10x, meaning that the customer must have 10% of the value of that position, subject to certain haircuts. During the Relevant Period, the substantial majority of margin trading was financed through Bifinex’s peer-to-peer (“P2P”) funding program. Through P2P, Bitfinex customers who held fiat or cryptocurrency in their Bitfinex account would “lend” those funds to other Bitfinex customers.
To provide margin funding, Bitfinex customers had to create a funding order that included the amount of funds available, interest rate, and period of funding. Bitfinex set the minimum financing duration at two days, and the maximum duration at 120 days. Once an offer to borrow was accepted, the financing recipient would then use those funds to buy, sell, and trade on the Bitfinex platform.
To trade with margin, Bitfinex customers are required to hold a percentage of the value of their open positions in a “Margin Wallet” on the exchange. Margin Wallets can hold fiat or cryptocurrencies such as tether tokens or bitcoin. A customer’s margined positions will remain open until the customer submits a closing trade, or Bitfinex initiates a forced liquidation. Typically, Bitfinex customers receive a margin call when the net value of their account equity held in the Margin Wallet drops below the required amount of margin for their open positions. If the equity falls below the required maintenance margin, Bitfinex will force-liquidate the customer’s positions and will act as the counterparty to that transaction.
During the Relevant Period, Bitfinex’s TOS required that, to engage in margin trading, customers: . . . irrevocably appoint Bitfinex to act as your exclusive agent in respect of any contract on the Site in which you are a Financing Recipient. Specifically, you hereby grant Bitfinex agency, and you authorize and instruct Bitfinex: to implement, levy, monitor, and maintain a lien on all Fiat amounts and Digital Tokens in your name or control in any Account (including any subaccount or any Digital Tokens Wallet) on the Site in favor of one or more Financing Providers (a “Lien”); and, to liquidate any Digital Tokens or Fiat in your name or control in any Account (including any subaccount or any Digital Tokens Wallet) if necessary to ensure that any Financing Provider on the Site from whom you have obtained financing is repaid in full.
Bitfinex force-liquidated certain positions and/or acted as a counterparty to certain transactions with non-ECP U.S. persons during the Relevant Period.
In the 2016 CFTC Order, the Commission ordered Bitfinex to cease and desist from offering, entering into, executing, or confirming the execution of financed retail commodity transactions to U.S. non-ECP customers unless such transactions are made on or subject to the rules of a board of a trade that has been designated or registered by the CFTC as a contract market or derivatives transaction execution facility in violation of Section 4(a) of the Act, and from accepting orders for retail commodity transactions and receiving funds from those customers in connection with those transactions in violation of Section 4d(a) of the Act, and order.
Bitfinex’s TOS stated that U.S. persons, subject to certain exceptions for ECPs as determined by Bitfinex in its sole discretion, could not access the platform’s services as of October 5, 2017, and U.S. entities could not access the platform’s services as of August 15, 2018. During the Relevant Period, customers, including those in the U.S., needed to provide only their name and a valid email address to open a “basic account” with Bitfinex. Throughout the Relevant Period, a basic account holder could deposit and withdraw cryptocurrencies, engage in exchange and margin trading, and provide margin funding, among other activities.
Respondents represent that Bitfinex has performed its own IP/location checks for customers for all accounts, including basic accounts, throughout the Relevant Period, including whenever a customer accessed their account; and further represent that since at least in or about November 2017, identified non-ECP U.S. persons were not permitted to withdraw fiat or stablecoin. Respondents also represent, that in or around November 2017, they expanded user verification procedures, previously in place for New York residents and others, to include U.S. individual customers.
However, during the Relevant Period, Bitfinex’s actions were not adequate to prohibit non-ECP U.S. persons from engaging in retail commodity transactions. Bitfinex was aware that some non-ECP U.S. customers continued to access the platform after the changes to the TOS. For example, on March 12, 2018, a Bitfinex manager reminded the entire customer support team that customers “can deposit/withdraw cryptocurrencies and trade fully (including USD pairs) without being verified on our site, there are no limits to this . . . . As background – it[‘s] not that hard to buy/sell BTC or whatever from another site and transfer it here, so anyone who is that motivated to use our site will have done so already. . .” Bitfinex customers, including those in the U.S., could click through and simply ignore the TOS and continue to access the Bitfinex platform.
In November 2018 Bitfinex developed an “Individual On-boarding Procedure” that outlined the “Know-Your-Customer” (“KYC”) program developed to “mitigate against Bitfinex, its customers and the products and services Bitfinex provides being used to facilitate money laundering, terrorist financing, sanctions violations, or other illicit activity.” This procedure allowed U.S. citizens that were “Bitfinex Personnel” (i.e., current employees or contractors) to trade on the Bitfinex Platform. In internal documents dated November 26, 2018, Bitfinex Personnel were advised that the platform “can no longer accept US residents (as of 4 Aug. 2017) if encountered” and instructed to not include U.S. persons on the “worksheet” used to track customer verification requests.
Throughout the Relevant Period, Bitfinex accepted deposits and withdrawals in fiat currency and other cryptocurrencies including bitcoin and USDt. Bitfinex’s systems and TOS required that customers needed to be “verified” in order to deposit fiat assets and USDt tokens, but need not be verified to deposit bitcoin or certain other cryptocurrencies. Respondents have represented that a customer cannot withdraw fiat or cryptocurrency assets, including USDt tokens, bitcoin, and other digital assets, without Bitfinex confirming that the customer is not a U.S. person. However, Bitfinex customers have been able to deposit cryptocurrencies and enter into retail commodity transactions on the Bitfinex platform without providing documentary proof of residence.
At various times during the Relevant Period, Bitfinex’s customer service representatives communicated with U.S.-based customers regarding various issues related to their accounts, including address changes that clearly identified the customers’ geographic location. On various occasions, customer service representatives encouraged customers based in the U.S. to use a VPN to create a private network from a public internet connection and mask the customer’s internet protocol (IP) address. For example, on or around April 3, 2018, a Bitfinex customer service representative informed a U.S. based customer that the platform is “not against VPNs . . . by any means -quite the opposite actually” and further stated that “Most users who simply use our platform to trade or offer margin funding will not need to provide KYC information”; however, if “AML-CTF flags are triggered . . . we may require our users to provide KYC information.”
III. LEGAL DISCUSSION
- Bitfinex Engaged in Illegal, Off-Exchange Retail Commodity Transactions in Violation of Section 4(a) of the Act
Pursuant to Section 2(c)(2)(D) of the Act, 7 U.S.C. § 2(c)(2)(D) (2018), any agreement, contract, or transaction in any commodity that is entered into with or offered to (even if not entered into with) non-ECPs on a leveraged or margined basis or financed by the offeror, counterparty, or a person acting in concert with the offeror or counterparty is, subject to certain exceptions, subject to Section 4(a) of the Act, 7 U.S.C. § 6(a) (2018), “as if the agreement, contract, or transaction was a contract of sale of a commodity for future delivery.”
Section 4(a) of the Act makes it unlawful for any person to offer to enter into, enter into, execute, confirm the execution of, or conduct an office or business in the United States for the purpose of soliciting, or accepting any order for, or otherwise dealing in any transaction in, or in connection with, a commodity futures contract, unless such transaction is made on or subject to the rules of a board of trade that has been designated or registered by the CFTC as a contract market for the specific commodity.
During the Relevant Period, Respondents offered to enter into, entered into, executed, and/or confirmed the execution of margined or leveraged retail commodity transactions with non-ECP U.S. persons on the Bitfinex platform. These retail commodity transactions were not conducted on or subject to the rules of a board of trade that has been designated or registered by the CFTC as a contract market and therefore violated Section 4(a) of the Act.
- Bitfinex Operated as an Unregistered Futures Commission Merchant in Violation of Section 4d(a)(1) of the Act.
Section 1a(28) of the Act, 7 U.S.C. § 1a(28) (2018), in relevant part, defines an FCM as any individual, association, partnership, corporation or trust that engages in soliciting or in accepting orders for or acting as a counterparty in “any agreement, contract, or transaction described in . . . section (2)(c)(2)(D)(i)” and, in connection therewith, “accepts any money . . . or property (or extends credit in lieu thereof) to margin . . . trades or contracts that result or may result therefrom.” Section 4d(a)(1) of the Act, 7 U.S.C. § 6d(a)(1) (2018), in pertinent part, makes it unlawful for any person to act as an FCM unless registered with the Commission as an FCM.
As described above, Bitfinex, while not registered as an FCM, acted during the Relevant Period as an FCM as defined in Section 1a(28) of the Act by accepting orders for and acting as a counterparty to retail commodity transactions with customers, and accepting money or property, including bitcoin and other cryptocurrencies, to margin these transactions. Therefore, Respondents violated Section 4d(a)(1) of the Act.
- BFXNA Violated the Prior Commission Order
The Commission issued its 2016 Order in In re BFXNA Inc. d/b/a Bitfinex, CFTC No. 16-19, 2016 WL 3137612 (June 2, 2016), and found that Respondent BFXNA had violated Sections 4(a) and 4d of the CEA, 7 U.S.C. §§ 6(a), 6d (2012). Part VII. A of the 2016 Order directs Respondent BFXNA Inc. to cease and desist from violating Sections 4(a) and 4d.
During the Relevant Period, BFXNA repeatedly violated the CEA, Regulations, and the 2016 Order because it offered to enter into, executed, and/or confirmed the execution of leveraged, margined, or financed retail commodity transactions, and none of the financed retail commodity transactions were conducted on or subject to the rules of a board of trade that has been designated or registered by the CFTC as a contract market in violation of Section 4(a) of the Act. BFXNA also repeatedly violated the CEA, Regulations, and the 2016 Order because it accepted orders for retail commodity transactions and received funds from those customers in connection with retail commodity transactions while not registered with the Commission in any capacity in violation of Section 4d of the Act. Respondent BFXNA thus violated Part VII. A of the 2016 Order.
III. FINDINGS OF VIOLATIONS
Based on the foregoing, the Commission finds that, during the Relevant Period, Respondents iFinex Inc., BFXNA Inc., and BFXWW Inc. violated Sections 4(a) and 4d(a)(1) of the Act, 7 U.S.C. §§ 6(a), 6d(a)(1) (2018) and Respondent BFXNA Inc. further violated Part VII. A of the 2016 Order.