Payment Ventures, Inc., doing business as Kraken (“Kraken”), entered into an order with the Commodities Futures Trading Commission (“CFTC”) on September 28, 2021 in connection with Kraken’s actions as an unregistered commodity exchange or futures commission merchant for digital assets between June, 2020 and July, 2021. Offering a pointed example of former CFTC Chair Gary Gensler’s warnings now that he chairs the Securities and Exchange Commission (“SEC”), the September 28, 2021 order described how Kraken had offered U.S. customers margined retail commodity trades on Kraken’s exchange without assessing whether those customers were eligible contract participants. Despite failing to assess customers’ eligible contract participant status, Kraken assessed customers to determine what level of margining Kraken would offer. Kraken maintained at least constructive custody of all digital assets or fiat currency purchased using margin if a customer chose to use Kraken’s margin. Sometimes Kraken kept constructive custody for more than two days on retail foreign currency trades or for more than twenty-eight days. As readers of the CFTC’s June 2020 guidance on digital assets will recognize, this alone might be problematic in light of the CFTC’s ability to look functionally at a customer’s ability to use a digital asset freely in commerce. And, if a customer owed Kraken on any trade, the customer couldn’t transfer any assets away from Kraken. Kraken never registered as a swap execution facility, designated contract market, or futures commission merchant with the CFTC but did cooperate with the CFTC’s investigation. The CFTC fined Kraken $1,250,000.
In her concurring statement, Commissioner Stump called on her fellow CFTC commissioners to consider regulations implementing the CFTC’s June 2020 guidance for digital asset companies. Commissioner Stump agreed that Kraken hadn’t followed the guidance and had violated the Commodity Exchange Act. She also pointed out that the interpretive guidance given last year should be backed up with regulations setting forth how a digital asset company acting as a futures commission merchant could comply with the Commodity Exchange Act, possibly even while also acting as a designated contract market. Commissioner Stump’s concurring statement presents the prospect of a set of regulations permitting designated contract markets to act simultaneously as futures commission merchants. While intriguing, we’ll need to see what incoming commissioners think of Commissioner Stump’s proposal. Commissioner Berkowitz’s resignation to become the SEC’s general counsel might be good for interagency cooperation, but it leaves the CFTC with only two commissioners on October 15, 2021: Commissioner Stump and Chair Behnam. Kristin Johnson and Christy Goldsmith Romero were nominated as commissioners but haven’t yet been confirmed.
For more details about this CFTC enforcement action, visit https://www.cftc.gov/LawRegulation/EnforcementActions/index.htm