Recent enforcement activity has sent a clear sign that the CFTC plans to focus on cryptocurrency markets. The Commission resolved an action against 1pool Ltd, the international securities dealer located in the Marshall Islands.
1pool and its chief executive officer were fined in three areas. First, they illegally offered retail commodity transactions that were margined in bitcoin. Second, they failed to register as a futures commission merchant. Lastly, they didn’t have the required anti-money laundering procedures in place.
This enforcement action is consistent with the CFTC’s Examination Priorities for 2019. It’s intended to signal an increase in future enforcement activity in cryptocurrency markets. As such, now is a good time for trading platforms to assess their regulatory approach and compliance framework for transactions with U.S. customers.
Deficiencies identified by the CFTC
Trading platforms need to remain mindful of the regulatory expectations in place with all jurisdictions where business is either conducted or solicited. Although much has evolved in the cryptocurrency arena, the CFTC has maintained a principal view that trading activities offered to U.S. customers require registration or exemptive relief. Key to navigating such matters with the CFTC will be understanding the deficiencies identified in similarly situated firms.
Failure to register
The solicitation or acceptance of orders from non-eligible contract participants, as defined in the Commodity Exchange Act, and the purchase or sale of commodities on a leveraged or financed basis requires the registration of a platform as a designated contract market, intermediary or exempt board of trade. As a matter of best practice, firms are advised to regularly maintain a thorough understanding of what activities are being performed and with whom.
When acting in a registrable capacity, firms must maintain and implement an adequate supervisory system inclusive of know-your-customer and customer identification procedures. Among other things, this requires that a firm obtains sufficient information from its customers to form a reasonable belief as to the true identity of each customer in order to prevent money laundering, illegal trading with U.S. non-eligible contract participants, or other illicit activity. Accordingly, it is advised that firms seek U.S. specific guidance in the implementation of any such program in order to ensure adequate coverage as well as an efficient allocation of resources.
How we can help
Bovill’s Markets practice works with a broad range of exchanges and trading platforms, including established players and start-ups, and crossing traditional and innovative asset classes. We work with aspiring registrants to:
- develop and validate a strategy, business plan and operating model
- select technology partners
- select the right jurisdiction for your ambitions
- manage the regulatory authorization process
- develop a control framework, including all required policies and procedures and an ongoing compliance monitoring programme
- provide specialist compliance and implementation resourcing.
We can offer support for firms seeking the Regulated Market, MTF and OTF designations in the EU, and the DCM, SEF and ATS designations in the US. We can also assist with payment services and e-money license applications. Get in touch to talk through your plans.
Download our ICO and Cryptocurrency strategies brochure.