In September of 2015, the U.S. Commodity Futures Exchange Commission, shut down San Francisco based Coinflip which was doing business as Derivabit. The reason given was basically that Coinflip was not registered as a trading platform, and it was caught selling commodity options. Up until this action, Bitcoins were not considered a commodity, by anyone. It was simply a digital crypto-currency. But, as with anything else, once it gains popularity and appears to generate wealth, the government starts taking an interest. And so it was with Coinflip.
For those who don’t know, Bitcoin has a market value just like government issued currencies like the U.S. Dollar or the Euro. It fluctuates just like the other currencies do. So what coinflip did was set up Derivabit, a platform that sold different types of options contracts. These were valued in U.S. Dollars and payable in bitcoin. The bids and options were matched through the Coinflip website.
Though prior to this action, the CFTC had no position on Bitcoins as a commodity, during the specified time period trades were recorded and the jig was up. Since this action, the CFTC has formalized its position and now states that digital currencies are commodities and any cryptocurrency derivatives, which includes futures, options and swaps, are now subject to the CFTC’s jurisdiction. It also clarified that any platform designated for the trading or executing of such cryptocurrency swaps must be registered as a SEF or a DCM.
What’s missing is the CFTC position on futures contracts, because Derivabit also advertised those. The problem for the CFTC is that during the time period that they were investigating Coinflip, the company didn’t offer and forward or futures contracts so they couldn’t rule on it because they didn’t witness it.
Nothing happened to Francisco Riordan, CEO of Coinflip, except that he had to shut down his company due to a “cease and desist” order. He thought that was fair. But what about the future? For one thing, in the future, companies that wish to trade Bitcoin derivatives legally will have to register as a swap execution facility (SEF) or a designated contract market (DCM) like the Chicago Mercantile Exchange (CME Group). And there is one other regulatory issue that future entrepreneurs will have to look out for.
Aside from Bitcoin being declared a commodity, in 2013 the SEC won a ruling that declared Bitcoin a currency. Being designated a currency makes Bitcoin investment securities which are subject to the regulations of securities and the jurisdiction of the Securities and Exchange Commission (SEC). Since they are currencies, the New York Department of Financial Services (DFS) and the Internal Revenue Service (IRS) are also able to claim jurisdiction. If you aren’t a careful entrepreneur, you may find yourself splashed into a bowl of alphabet soup.