[2018-09-27] SEC Charges Bitcoin-Funded Securities Dealer and CEO (1Broker)

[Harlot]

If the United States government, which does not have jurisdiction in Austria, can seize a small exchange's domain name. Can it also seize the domains of larger exchanges based on foreign soil like Binance?

Yeah I guess so domains are part of that company's operations and even though it operates internationally it does not exempt it to still continue running in other regions, if they are still under investigation I doubt that they can still maintain normal operations. Think of it as a temporary confiscation of your cellphone. You cannot use it until your teacher/professor hands it back to you again. Also keep in mind they are in criminal proceedings I doubt that they will be allowed by the court to continue anything why they are under investigation.

[figmentofmyass]

What about Bitfinex?

They seem to have had some tensions with CFTC in the past over what they incorrectly called currency swaps (or how they were actually called). The exchange had even been penalized, though I don't know if they paid the penalty, but since then they seem to be below the radar of Uncle Same and the US financial authorities like SEC or CFTC. Or we just don't know what's going on there and what's being deliberately kept under wraps. Then, when we finally find out, it may already be too late

Since then they specifically excluded Americans. Since they're happily chugging on I guess it's safe to presume they're alright. I don't really get how or why though.

the story was a bit more eventful than that. in june 2016, the CFTC fined them for violating the commodity exchange act, their primary complaint being that swaps did not result in bitcoins being "delivered" to buyers but rather were being held by bitfinex. in response, bitfinex unrolled its bitgo-powered customer segregated wallets---the thinking being that segregating funds by customers would satisfy the CTFC. as it turned out, their bitgo wallet setup was essentially 100% hot wallet, and it led to 120k BTC being stolen in the august hack.

they didn't prohibit US customers until another year after that---they served US customers for like 5 years, transmitting money with no licenses. given that federal agencies take years to build cases, i wouldn't presume they're alright. the CFTC sent new subpoenas to bitfinex and tether last december, and the launch of CBOE/CME futures puts them under CFTC jurisdiction whether or not they prohibited US residents.

i'd be very careful storing much on bitfinex or holding much USDT. i won't be surprised if they get shut down by the feds too.

[deisik]

they didn't prohibit US customers until another year after that---they served US customers for like 5 years, transmitting money with no licenses. given that federal agencies take years to build cases, i wouldn't presume they're alright. the CFTC sent new subpoenas to bitfinex and tether last december, and the launch of CBOE/CME futures puts them under CFTC jurisdiction whether or not they prohibited US residents.

What was the outcome of these late 2017 investigations?

Also, what does Bitfinex have to with CBOE/CME futures if these are traded on CME (in Chicago) and not on Bitfinex (who knows where but definitely outside the US territory), when Bitfinex has nothing to do with both Bitcoin futures and US residents probably trading these futures. I don't see a connection here. In short, how does the launch of Bitcoin cash-settled futures traded on a specific exchange (not Bitfinex) put them under CFTC jurisdiction all of a sudden? Care to explain?

[figmentofmyass]

they didn't prohibit US customers until another year after that---they served US customers for like 5 years, transmitting money with no licenses. given that federal agencies take years to build cases, i wouldn't presume they're alright. the CFTC sent new subpoenas to bitfinex and tether last december, and the launch of CBOE/CME futures puts them under CFTC jurisdiction whether or not they prohibited US residents.

What was the outcome of these late 2017 investigations?

i don't think there's been any public news since then. it could be nothing, or they could be building a case against bitfinex or tether. who knows?

Also, what does Bitfinex have to with CBOE/CME futures if these are traded on CME (in Chicago) and not on Bitfinex, when Bitfinex has nothing to do with both Bitcoin futures and US residents probably trading these futures. I don't see a connection here. In short, how does the launch of Bitcoin cash-settled futures traded on a specific exchange (not Bitfinex) put them under CFTC jurisdiction all of a sudden? Care to explain?

the CFTC views the existence of CFTC-regulated futures markets as the basis for jurisdiction over the underlying spot market. it sounds crazy, but that's their historic view, and it's been consistently upheld by federal judges.

in fact, the courts just established much more far-reaching precedent:

Crater’s lawyers moved to dismiss the case, arguing that the CFTC had no authority over the virtual currency because it is neither a tangible good nor a service on which future contracts are being traded - the agency’s typical enforcement purview.

U.S. District Judge Rya Zobel in Boston said on Wednesday that My Big Coin did meet the Commodity Exchange Act’s definition of a commodity, because the law defines commodities in broad categories rather than specific types or brands.

Since both My Big Coin and bitcoin can both be broadly categorized as virtual currencies, and bitcoin futures currently trade on U.S. exchanges, by extension the CFTC has oversight of other virtual currencies including My Big Coin, Zobel found.

apparently regulated bitcoin futures not only means CFTC oversight of the bitcoin market, but altcoins as well!

[Kprawn]

The SEC is slowly but surely closing all the little loopholes for services like 1Broker to exist. The US government want their

piece of the pie and they want to be in control. This is why I think they are playing games with the Bitcoin Futures applications

too. Bitcoin is like the hot potato game, it gets passed on from one country to the next, to see what are people do with it. The

US are one of the key players in the global economy, so if the SEC clamp down on this, the rest will follow. 

[European Central Bank]

so if the SEC clamp down on this, the rest will follow.  

that would be valid if the SEC were seen to be pulling new laws out of their ass. they're not.

they're applying laws that have long existed to a bunch of cocky tech assholes who thought they were somehow magically exempt from them. they seem to be shocked when it proves to not be the case.

[squatter]

so if the SEC clamp down on this, the rest will follow.  

that would be valid if the SEC were seen to be pulling new laws out of their ass. they're not.

they're applying laws that have long existed to a bunch of cocky tech assholes who thought they were somehow magically exempt from them. they seem to be shocked when it proves to not be the case.

To be honest, I always figured brokers like this were a ticking time bomb since they offer CFDs to US residents. US residents are generally prohibited from trading CFDs through traditional brokers because they violate securities law:

U.S. regulations don’t allow retail Americans to trade CFDs

The CFTC and SEC require retail Americans to trade financial products on-exchange. One exception: retail Americans may trade forex off-exchange in the Interbank market, providing it’s with a U.S. registered counterparty including an NFA-registered domestic or foreign Futures Commission Merchant (FCM) or Forex Dealer Member (FDM), or bank registered with a U.S. regulator.

CFDs pose two problems for retail Americans: CFDs are not forex, so the one exception to trading off-exchange products above doesn’t apply, and retail Americans don’t trade CFDs with U.S. registered counterparties. The CFTC considers a CFD contract based on the underlying price of forex, to be a CFD and not a forex contract.

The Dodd-Frank Act requires clearing of swap contracts for retail investors on U.S. exchanges, which means it’s not an off-exchange financial instrument. For example, security-based swaps on Apple equity for retail investors clear on a U.S. securities exchange.

1Broker brokered off-exchange financial instruments to US retail investors. They also never registered as a broker-dealer even though they were arguably dealing in unregistered securities. The government's case is strong.

[deisik]

they didn't prohibit US customers until another year after that---they served US customers for like 5 years, transmitting money with no licenses. given that federal agencies take years to build cases, i wouldn't presume they're alright. the CFTC sent new subpoenas to bitfinex and tether last december, and the launch of CBOE/CME futures puts them under CFTC jurisdiction whether or not they prohibited US residents.

What was the outcome of these late 2017 investigations?

i don't think there's been any public news since then. it could be nothing, or they could be building a case against bitfinex or tether. who knows?

Also, what does Bitfinex have to with CBOE/CME futures if these are traded on CME (in Chicago) and not on Bitfinex, when Bitfinex has nothing to do with both Bitcoin futures and US residents probably trading these futures. I don't see a connection here. In short, how does the launch of Bitcoin cash-settled futures traded on a specific exchange (not Bitfinex) put them under CFTC jurisdiction all of a sudden? Care to explain?

the CFTC views the existence of CFTC-regulated futures markets as the basis for jurisdiction over the underlying spot market. it sounds crazy, but that's their historic view, and it's been consistently upheld by federal judges.

But where is this underlying spot market located?

Obviously, if it is located within the US boundaries, it kinda makes sense. For example, there's a sugar spot market along with sugar futures, but does it mean that the CFTC has jurisdiction over sugar spot market somewhere in Shanghai, or elsewhere outside the US? This is meaningless as they don't have jurisdiction there by any means possible. If Bitfinex excludes the US residents from trading Bitcoin, it is beyond the jurisdiction of the CFTC. Of course, this doesn't in the least prevent Bitfinex from being seized by the FBI under whatever pretext (as it happened to BTC-e) but then the CFTC would have nothing to do with that. It may oversight Bitcoin markets as well as altcoins but only those in the US as far as I understand it

[figmentofmyass]

But where is this underlying spot market located?

Obviously, if it is located within the US boundaries, it kinda makes sense. For example, there's a sugar spot market along with sugar futures, but does it mean that the CFTC has jurisdiction over sugar spot market somewhere in Shanghai, or elsewhere outside the US? This is meaningless as they don't have jurisdiction there by any means possible.

that's not how jurisdiction works. you know that 110 countries will extradite to the USA, right? bitfinex and tether immediately responded to the subpoenas because the USA is in a position to fuck them.

it doesn't matter where the activity occurs if the united states has mutual legal assistance treaties with relevant governments---

MLATs, which are negotiated by the Department of State in cooperation with the Department of Justice to facilitate cooperation in criminal matters, are in force with the following countries: Antigua & Barbuda, Argentina, Australia, Austria, the Bahamas, Barbados, Belgium, Belize, Brazil, Canada, Cyprus, Czech Republic, Dominica, Egypt, Estonia, France, Germany, Greece, Grenada, Hong Kong, Hungary, India, Ireland, Israel, Italy, Jamaica, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Malaysia, Mexico, Morocco, the Kingdom of the Netherlands (including Aruba, Bonaire, Curacao, Saba, St. Eustatius and St. Maarten), Nigeria, Panama, Philippines, Poland, Romania, Russia, St. Lucia, St. Kitts & Nevis, St. Vincent & the Grenadines, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, Trinidad & Tobago, Turkey, Ukraine, United Kingdom (including the Isle of Man, Cayman Islands, Anguilla, British Virgin Islands, Montserrat and Turks and Caicos), Uruguay, and Venezuela. In addition, on February 1, 2010, 27 U.S.-EU Instruments/Agreements/Protocols entered into force that either supplement existing MLATs or create new mutual legal assistance relationships between the United States and every member of the EU.

In addition to MLATs, the United States has a Mutual Legal Assistance Agreement (MLAA) with China, as well as a MLAA between the American Institute in Taiwan and the Taipei Economic and Cultural Representative Office in the United States. The United States also has entered into a few executive agreements on forfeiture cooperation, including: an agreement with the United Kingdom providing for forfeiture assistance and asset sharing in narcotics cases; a forfeiture cooperation and asset sharing agreement with the Kingdom of the Netherlands; and a drug forfeiture agreement with Singapore. The United States has asset sharing agreements with Canada, the Cayman Islands (which was extended to Anguilla, British Virgin Islands, Montserrat, and the Turks and Caicos Islands), Colombia, Ecuador, Jamaica, Mexico, and Monaco.

bitfinex will bank where it can facilitate international bank wires. they can't facilitate money transmission from chinese banks, so they won't bank there. storing all their money in north korea or iran won't help either. their money is likely banked in multiple jurisdictions, some of which are reachable by the long arm of the USA law. this is why we can't fault btc-e for losing so much funds last year. their money processors (mostly run by mayzus) were based in the UK.

If Bitfinex excludes the US residents from trading Bitcoin, it is beyond the jurisdiction of the CFTC. Of course, this doesn't in the least prevent Bitfinex from being seized by the FBI under whatever pretext (as it happened to BTC-e) but then the CFTC would have nothing to do with that. It may oversight Bitcoin markets as well as altcoins but only those in the US as far as I understand it

as pointed out above, that's absolutely not how the CFTC views its mandate. they are not restricted to US markets whatsoever.

in fact, the CFTC is charging 1broker in this case. 1broker is an "international" site with CEO based in austria. the CFTC is not charging them for dealing with US securities/markets. they are charging them for unlawful retail commodity transactions (illegal swaps), failure to register and failure to implement AML procedures:

On the same day, the CFTC filed a civil enforcement action against 1pool Ltd. and Brunner, stating:

The CFTC’s complaint charges the defendants with engaging in unlawful retail commodity transactions, failing to register as a Futures Commission Merchant (FCM), and supervisory violations for failing to implement procedures to prevent money laundering as required under federal laws and regulations.