CFTC Enforcement Actions Against Tether, Kraken And Bitfinex Reasserts Agency's Broad Jurisdiction In Crypto

• Published date: 21 October 2021
• Subject Matter: Finance and Banking, Technology, Financial Services, Commodities/Derivatives/Stock Exchanges, Fin Tech
• Law Firm: Willkie Farr & Gallagher LLP
• Author: Mr Neal E. Kumar, J. Christopher Giancarlo, Justin L. Browder, Serge Agbre and Alexandra Calabro

The Commodity Futures Trading Commission ("CFTC") continues to push an aggressive enforcement regime against participants in the steadily growing digital asset markets. In recent weeks, the CFTC has published separate speaking order settlements against major institutions involved in digital asset markets, including Tether, Kraken and Bitfinex.¹ Importantly, these settlements demonstrate a long term trend at the CFTC to pursue enforcement actions in the digital asset markets because the investigations associated with these settlements appear to originate from prior CFTC administrations.

These settlements also bring to light the complicated web of CFTC jurisdiction over the commodities markets. The Tether settlement highlights the CFTC's limited jurisdiction to pursue fraud and manipulation in the commodities market. Importantly, the Tether settlement also represents the first CFTC settlement addressing a so-called stablecoin, and serves to lay down a marker that the CFTC considers one of the major stablecoins in the digital asset market to be a commodity under the CFTC's jurisdiction rather than a security regulated by the Securities and Exchange Commission ("SEC"). On the other hand, both the Kraken and Bitfinex settlements showcase the CFTC's jurisdiction to regulate fully certain retail commodity transactions that trade on margin.

In total, these enforcement actions resulted in penalties amounting to approximately $43.75 million, with the Tether settlement representing nearly all of the total amount at $41 million.²

Tether Settlement

In 2014, Tether introduced a stablecoin called the U.S. dollar tether token ("USDt"), which is pegged to the U.S. dollar.³ The CFTC defined a "stablecoin" as a type of virtual currency whose value is derived from a fiat currency.⁴ Although Tether offered a number of tether tokens, the dominant offering was the USDt. In reaching its decision in the Tether Order, the CFTC determined that stablecoins, like those offered by Tether, fall within the definition of a "commodity" under the CEA on the basis that courts have ruled that digital currencies fall within the definition of a commodity.⁵

Since 2014, Tether "represented that one USDt may always be redeemed for one U.S. dollar."⁶ Prior to November 2017, USDt could only be acquired and redeemed through Tether's platform. At some point in November 2017, Tether's systems were the target of a cyber-attack which resulted in the unauthorized transfer of nearly 31 million units of...