The Commodity Futures Trading Commission (“Commission”) has reason to believe that from in or about March 2014 to at least August 2014 (the “Relevant Period”), Coinflip, Inc., d/b/a Derivabit (“Coinflip”) and Francisco Riordan (“Riordan”) (the “Respondents”) violated Sections 4c(b) and 5h(a)(1) of the Commodity Exchange Act, as amended (the “Act”), 7 U.S.C. §§ 6c(b) and 7b-3(a)(1) (2012), and Commission Regulations 32.2 and 37.3(a)(1), 17 C.F.R. § 32.2 and 37.3(a)(1) (2014). Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted to determine whether the Respondents engaged in the violations set forth herein and to determine whether any order should be issued imposing remedial sanctions.
II.
In anticipation of the institution of an administrative proceeding, the 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 Sections 6(c) and 6(d) of the Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions (“Order”) and acknowledge service of this Order.
III.
The Commission finds the following:
- Summary
During the Relevant Period, Respondents violated Sections 4c(b) and 5h(a)(l) of the Act and Commission Regulations 32.2 and 37.3(a)(l) by conducting activity related to commodity options contrary to Commission Regulations and by operating a facility for the trading or processing of swaps without being registered as a swap execution facility or designated contract market. Specifically, during the Relevant Period, Respondents operated an online facility named Derivabit, offering to connect buyers and sellers of Bitcoin option contracts.
- Respondents
Coinflip, Inc. is a Delaware corporation with a principal place of business in San Francisco, California. During the Relevant period, Coinflip operated Derivabit and its website derivabit.com. Coinflip has never been registered with the Commission.
Francisco Riordan is an individual residing in San Francisco, California. Riordan is a founder, the chief executive officer, and controlling person of Coinflip. Riordan has never been registered with the Commission.
- Facts
Coinflip Conducted Activity Related to Illegal Commodity Options
Beginning in March 2014, Coinflip advertised Derivabit as a “risk management platform… that connects buyers and sellers of standardized Bitcoin options and futures contracts.” During this period, Coinflip designated numerous put and call options contracts as eligible for trading on the Derivabit platform. For these contracts, Coinflip listed Bitcoin as the asset underlying the option and denominated the strike and delivery prices in US Dollars. According to the derivabit.com website, a customer could place orders by registering as a user and depositing Bitcoin into an account in the user’s name. Premiums and payments of settlement of the option contracts were to be paid using Bitcoin at a spot rate determined by a designated third-party Bitcoin currency exchange. Users had the ability to, and in fact did, post bids or offers for the designated options contracts. Coinflip confirmed the bid or offer by communicating it to all users through its website.
During the Relevant Period, Derivabit had approximately 400 users.
Riordan Controlled Coinflip and Directed Its Operations
Riordan was the founder, engineer and Chief Executive Officer of Coinflip. He exercised control over Coinflip’s daily operations and possessed the power or ability to control all aspects of the Derivabit platform. Riordan participated in key aspects of Coinflip’s illegal activity, including designing and implementing the Derivabit trading platform. Riordan’s control enabled him to make design and substantive changes to Coinflip’s operations, including the transition from offering Bitcoin options to OTC Bitcoin Forward Contracts. Ultimately, Riordan possessed the power and ability to direct Coinflip to cease operating the Derivabit platform.
LEGAL DISCUSSION
- Virtual Currencies Such as Bitcoin are Commodities
Section 1a(9) of the Act defines “commodity” to include, among other things, “all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.” 7 U.S.C. § 1a(9). The definition of a “commodity” is broad. See, e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 (7th Cir. 1982). Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.
- Coinflip Violated Sections 4c(b) Act and Commission Regulation 32.2
Section 4c(b) of the Act makes it unlawful for any person to “offer to enter into, enter into or confirm the execution of, any transaction involving any commodity … which is of the character of, or is commonly known to the trade as, an ‘option’ … , ‘bid’, ‘offer’, ‘put’, [or] ‘call’ … contrary to any rule, regulation, or order of the Commission prohibiting any such transaction.” Section 1.3(hh) defines a “commodity option transaction” and “commodity option” to “mean any transaction or agreement in interstate commerce which is or is held out to be of the character of, or is commonly known to the trade as, an ‘option,’ ‘privilege,’ ‘indemnity,’ ‘bid,’ ‘offer,’ ‘call,’ ‘put,’ ‘advance guaranty,’ or ‘decline guaranty,’ and which is subject to regulation under the Act and these regulations.” Section 32.2 of the Commission’s Regulations, in turn, provides that it shall be unlawful for any person to “offer to enter into, enter into, confirm the execution of, maintain a position in, or otherwise conduct activity related to any transaction in interstate commerce that is a commodity option transaction unless: (a) [s]uch transaction is conducted in compliance with and subject to the provisions of the Act, including any Commission rule, regulation, or order thereunder, otherwise applicable to any other swap, or (b) [s]uch transaction is conducted pursuant to [Regulation] 32.3.”
Between at least March 2014 and July 2014, Respondents conducted activity related to commodity option transactions, offered to enter into commodity option transactions and/or confirmed the existence of commodity option transactions. The options transactions were not conducted in compliance with Section 5h(a)(1) of the Act or Regulation 37.3(a)(l), a section of the Act and a Commission regulation otherwise applicable to swaps (see infra Section C) and were not conducted pursuant to Regulation 32.3. Accordingly, Coinflip violated Section 4c(b) of the Act and Commission Regulation 32.2.
- Coinflip Violated Section 5h(a)(l) of the Act
Section 5h(a)(1) of the Act forbids any person from operating “a facility for the trading or processing of swaps unless the facility is registered as a swap execution facility or as a designated contract market….” 7U.s.c.’§7b-3(a)(1). Section1(a)(47) of the Act’s definition of “swap” includes option contracts. 7 U.S.C. § 1a(47)(A)(i). Regulation 37.3(a)(1) similarly requires that any “person operating a facility that offers a trading system or platform in which more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform shall register the facility as a swap execution facility under this part or as a designated contract market under part 38 of this chapter.” 17 C.P.R. § 37.3(a)(l) (2014).
During the Relevant Period, Coinflip operated a facility for the trading of swaps. However, Coinflip did not register the facility as a swap execution facility or designated contract market. Accordingly, Coinflip violated Section 5h(a)(l) of the Act and Regulation 37.3(a)(1).
- Riordan Is Liable for Coinflip’s Violations as Its Controlling Person Under Section 13(b) of the Act
Riordan controlled Coinflip, directly or indirectly, and did not act in good faith or knowingly induced, directly or indirectly, Coinflip’s acts in violation of the Act and Regulations; therefore, pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b) (2012), Riordan is liable for Coinflip’s violations of Sections 4c(b) and 5h(a)(1) of the Act, 7 U.S.C. §§ 6c(b) and 7b-3(a)(l) (2012) and Regulations 32.2 and 37.3(a)(1), 17 C.P.R.§§ 32.2 and 37.3(a)(1) (2014).
IV.
FINDINGS OF VIOLATIONS
Based on the foregoing, the Commission finds that, during the Relevant Period, Respondents violated Sections 4c(b) and 5h(a)(1) of the Act, 7 U.S.C. §§ 4c(b) and 7b-3(a)(l) (2012), and Commission Regulations 32.2 and 37.3(a)(l), 17 C.P.R. §§ 32.2 and 37.3(a)(1) (2014).