BitMEX BSA Case Raises Key Crypto Questions

The defendants responded that, in practice, the CFTC has not required exchanges to register as FCMs. The defendants provided several examples where exchanges that performed functions similar to BitMEX have registered with the CFTC as designated contract markets, swap execution facilities or derivatives clearing organizations, but have not been required to register as FCMs.

And the publicly available FCM registration database shows that several other peer-to-peer and derivatives trading exchanges are not, even now, registered as FCMs.⁸

The defendants argued that, considering this broader context, exchanges like BitMEX would not have realized that the CFTC expected them to register as FCMs.

Of course, whether or not the CFTC has failed to enforce the registration requirement as to other exchanges would not excuse the defendants' failure to register if they knew or should have known they were required to do so.

And according to the government, it will present evidence at trial that the defendants did know that they were required to register and comply with the BSA.

The court therefore agreed that dismissal at this stage was not appropriate and that the government should have an opportunity to prove the defendants' knowledge and intent at trial.

This leads to the defendants' second set of arguments, which also related to regulatory uncertainty.

Specifically, the defendants argued that BitMEX was required to register as an FCM only if bitcoin and other cryptocurrencies were commodities under the Commodity Exchange Act, and that this question remained unsettled during the relevant period.

The CFTC defines a commodity, in relevant part, as "all other goods and articles ... and all services, rights, and interests ... in which contracts for future delivery are presently or in the future dealt in."¹⁰

Cryptocurrencies arguably fall under this broad definition. Beginning in late 2014, the CFTC noted in public testimony before Congress that virtual currencies such as bitcoin may fall within the CFTC's jurisdiction.¹¹

And in late 2015, the CFTC issued two public enforcement orders in which it stated that bitcoin was a commodity under the Commodity Exchange Act.¹²

Courts, including in the Southern District of New York, have also interpreted Section 1a(9) of the Commodity Exchange Act to include cryptocurrencies like bitcoin.[[N:See, e.g., CFTC v. Reynolds , No. 19 Civ. 05631 (MKV), 2021 WL 796683, at *5 (S.D.N.Y. Mar. 2, 2021) ("Virtual currencies such as Bitcoin are encompassed in the definition of 'commodity' under Section 1a(9) of the [CEA]."); CFTC v. Gelfman Blueprint, Inc., No. 17 Civ. 7181 (PKC), 2018 WL 6320656, at *8 (S.D.N.Y. Oct. 16, 2018) (same); CFTC v. McDonnell, 287 F. Supp. 3d 213, 228 (E.D.N.Y. 2018) (virtual currencies "fall well within the common definition of 'commodity'").]]

However, as the defendants pointed out, the US Securities and Exchange Commission has claimed that in certain circumstances, cryptocurrencies are properly classified as securities.

Over the last few years, the SEC has brought several enforcement actions alleging that initial coin offerings constituted the unlawful offer and sale of unregistered securities.¹³

And in May 2019, the SEC issued a framework for investment contract analysis of digital assets, in which it applied the test established by the US Supreme Court's 1946 decision in SEC v. W. J. Howey Co. to assert that cryptocurrencies may be investment contracts, and therefore securities, if they are the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.¹⁴

The SEC has also asserted that cryptocurrency products may be notes, and thus securities, under the test established by the Supreme Court in 1990 in Reves v. Ernst & Young.¹⁵

In SEC v. Kik Interactive Inc., US District Judge Alvin Hellerstein in the Southern District of New York agreed in 2020 that certain cryptocurrency products could be considered investment contracts under the Howey test.¹⁶

There is little doubt that some measure of uncertainty exists in this industry. The CFTC and SEC have both asserted jurisdiction over regulating cryptocurrencies, and the question of which cryptocurrency-related products are commodities and which are securities has not been definitively answered.[[N:See, e.g., CFTC v. McDonnell, 287 F. Supp. 3d at 228 (stating that the "SEC, IRS, DOJ, Treasury Department, and state agencies have increased their regulatory action in the field of virtual currencies without displacing CFTC's concurrent authority"); SEC, Testimony of SEC Chair Gary Gensler before the Senate Committee on Banking, Housing, and Urban Affairs (Sept. 14, 2021) (stating that the SEC and CFTC "each have relevant, and in some cases, overlapping jurisdiction in the crypto[currency] markets").]]

Various members of Congress recently have proposed legislation that would provide clearer guidance.¹⁷

And the White House is expected to issue an executive order this month to coordinate the federal government's approach to cryptocurrencies, which will include, in addition to the CFTC and SEC, the Office of the Comptroller of the Currency, the Federal Reserve, and the US Department of the Treasury.¹⁸ In short, regulatory lines are still being drawn.

In the context of the BitMEX case, however, the government successfully argued that the defendants knew or should have known, at the very least, that facilitating trades in bitcoin derivatives fell under the CFTC's jurisdiction.

The government argued that as of 2015, there was clear indication from the CFTC that it viewed bitcoin—putting aside other cryptocurrencies—as a commodity, and that the CFTC may regulate futures and swaps contracts in any commodity.

As Stump recently put it, "The CFTC does not regulate commodities," but instead "regulates derivatives—and this is true for digital assets just as for any other asset class."¹⁹

In other words, the government does not have to establish that all cryptocurrencies are commodities to prevail at trial; it need only establish that BitMEX facilitated trades in bitcoin derivatives, and that the defendant on trial knew or should have known that this activity meant that BitMEX had to comply with the BSA.