     
Recent Developments in the Regulatory
Treatment of Bitcoin
October 19, 2015
On September 17, 2015, the U.S. Commodity
Futures Trading Commission (“CFTC”) issued an
order (the “Coinflip Order”) filing and
simultaneously settling charges against Coinflip,
Inc. (“Coinflip”) and its chief executive officer. 1
In the Coinflip Order, the CFTC took the view
for the first time that bitcoin and other virtual
currencies 2 are commodities subject to the
Commodity Exchange Act (“CEA”) and CFTC
regulations.
Shortly thereafter, on September 24, 2015, the
CFTC issued an order (the “Tera Order”) filing
1
2
In the Matter of Coinflip, Inc., d/b/a Derivabit, and
Francisco Riordan, CFTC Docket No. 15-29 (Sept. 17,
2015),
available
at
http://www.cftc.gov/idc/groups/public/@lrenforce
mentactions/documents/legalpleading/enfcoinflipror
der09172015.pdf.
All factual statements in this
Stroock Special Bulletin with respect to the Coinflip
Order represent the findings of the CFTC, which
Coinflip has not admitted or denied in agreeing to
settle with the CFTC.
The CFTC defined a “virtual currency” as “a digital
representation of value that functions as a medium of
exchange, a unit of account, and/or a store of value,
but does not have legal tender status in any
jurisdiction.”
and simultaneously settling charges against
TeraExchange, LLC (“Tera”), a provisionally
registered Swap Execution Facility (“SEF”), arising
out of a prearranged wash trade on its SEF
platform for trading non-deliverable forward
contracts based on the relative value of the U.S.
dollar and bitcoin (“Bitcoin Swaps”). 3
The Coinflip Order and the Tera Order
followed the release on September 15, 2015, by
the Conference of State Bank Supervisors
(“CSBS”) of a Model Regulatory Framework for
State Regulation of Certain Virtual Currency
Activities, stating that third party control of virtual
currency should be subject to state regulatory
scrutiny. The following week, on September 23,
2015, the New York Department of Financial
Services (“NYDFS”) awarded Circle Internet
3
In the Matter of TeraExchange LLC, CFTC Docket
No. 15-33 (Sept. 24, 2015), available at
http://www.cftc.gov/idc/groups/public/@lrenforce
mentactions/documents/legalpleading/enfteraexchan
georder92415.pdf. All factual statements in this
Stroock Special Bulletin with respect to the Tera Order
represent the findings of the CFTC, which Tera has
not admitted or denied in agreeing to settle with the
CFTC.
      •   •   •  • , 
  ,  ,  -  ..  .. ..
  
Financial Inc. (“Circle”) the state’s first
“BitLicense,” making it the first company to be
licensed to offer digital currency services in New
York. 4
“commodity” under Section 1a(9) of the CEA, 7
which provides that the term “commodity”
includes, among other things, “all services, rights,
and interests in which contracts for future delivery
are presently or in the future dealt in.”
Accordingly, the CFTC found that Coinflip’s
failures to either register with the CFTC or
confine its activities to the “trade option”
exemptions resulted in violations of Sections 4c(b)
of the CEA8 and CFTC Regulation 32.2. 9
This Stroock Special Bulletin explains the
background and implications of these recent
developments in the regulatory treatment of
bitcoin and other virtual currencies.
Coinflip Order
Between at least March 2014 and August 2014,
Coinflip operated an online platform called
Derivabit, with approximately 400 users offering
put and call option contracts on bitcoin. 5 Though
the strike and delivery prices on the contracts were
denominated in U.S. dollars, all premiums and
settlement payments were to be paid using bitcoin
at a spot rate derived from a third-party bitcoin
currency exchange. Coinflip took bids and offers
on such contracts from Derivabit users with online
accounts into which they deposited bitcoins. Any
such bids and offers were communicated to all
other Derivabit users. Coinflip did not register
with the CFTC to offer such options, or take any
steps to ensure that the options would be subject to
the “trade option” exemptions set forth in CFTC
Regulation 32.3. 6
The CFTC’s definition of “swap” under Section
1a(47) of the CEA 10 also includes option contracts
of this type. Thus, because Coinflip had failed to
register Derivabit as a swap execution facility or a
designated contract market for swaps, the CFTC
found that Coinflip had also violated Section
5h(a)(1) of the CEA 11 and CFTC Regulation
37.3(a)(1), 12 which prohibit any person from
operating a swap trading facility not registered as a
swap execution facility or as a designated contract
market.
The Coinflip Order did not impose any
monetary penalty against Coinflip, and the
language of the order suggests that a bitcoin
options trading platform could become properly
registered as a swap execution facility or as a
designated contract market allowed to engage in
such activities – the problem for Coinflip was that
it had not done so. Indeed, Aitan Goelman, the
CFTC’s Director of Enforcement, explained in the
CFTC’s official press release that “[w]hile there is a
lot of excitement surrounding Bitcoin and other
The CFTC found that bitcoin (like other virtual
currencies) falls within the broad definition of
4
5
6
The NYDFS finalized its regulations related to
BitLicense, a comprehensive framework for
regulating digital currency firms, on June 3, 2015.
Coinflip also offered bitcoin forward contracts
through its website, though no bids or offers were
ever placed for these forward contracts. Accordingly,
in the CFTC Order, the CFTC explained that
“[a]lthough these activities may have violated, or led
to violations of, the Commodity Exchange Act, the
Commission does not address this conduct here.”
17 C.F.R. §§ 32.3(a)(1)(i)-(ii) and 32.3(a)(2).
7
8
9
10
11
12

7 U.S.C. § 1a(9).
7 U.S.C. § 6c(b).
17 C.F.R. § 32.2.
7 U.S.C. § 1a(47)(A)(i).
7 U.S.C. § 7b-3(a)(1).
17 C.F.R. § 37.3(a)(1).
  
virtual currencies, innovation does not excuse
those acting in this space from following the same
rules applicable to all participants in the commodity
derivatives markets.”
participants from engaging in wash trading and
prearranged trading. 13
The CFTC explained that a wash trade “‘is a
transaction made without an intent to take a
genuine, bona fide position in the market, such as a
simultaneous purchase and sale designed to negate
each other so that there is no change in financial
position[,]’” 14 and that prearranged trading involves
“‘the use of trading techniques that give the
appearance of submitting trades to the open market
while negating the risk of price competition
incident to such a market.’” 15
Tera Order
On September 11, 2014, Tera filed with the
CFTC’s Division of Market Oversight (“DMO”) a
submission self-certifying Bitcoin Swaps for trading
on its SEF. Valuations of Bitcoin Swaps were to
be determined by reference to an index of bids,
offers and executed transactions on a number of
bitcoin exchanges. On October 8, 2014, Tera
arranged for two customers to enter into “roundtrip” prearranged Bitcoin Swap trades that would
offset and negate any market risk (the “RoundTrip Bitcoin Swap Trades”). Tera did not charge a
transaction fee or commission to either party.
The CFTC noted that the traders entered into
the Round-Trip Bitcoin Swap Trades with the
knowledge that the Round-Trip Bitcoin Swap
Trades were designed to achieve a wash result with
no profit or loss implications. The CFTC noted
further that as the only participants in the bitcoin
swap market, neither trader bore any risk, because
their transactions set the only prices in the market.
The CFTC distinguished the Round-Trip Bitcoin
Swap Trades from a scenario in which “a SEF or
other designated contract market runs preoperational test trades to confirm that its systems
are technically capable of executing transactions
and, to the extent these simulated transactions
become publicly known, makes it clear to the
public that the trades do not represent actual
liquidity in the subject market.” 16
That same day—October 8, 2014—the DMO
and the National Futures Association (“NFA”)
separately contacted Tera regarding the RoundTrip Bitcoin Swap Trades. In response to these
inquiries, Tera informed the DMO and NFA that
the purpose of the Round-Trip Bitcoin Swap
Trades was to “test the pipes.” Despite this
response, the next day, Tera: (1) issued a press
release announcing that the Round-Trip Bitcoin
Swap Trades represented the first bitcoin derivative
transactions to be executed on a regulated
exchange; and (2) informed the CFTC’s Global
Markets Advisory Committee (via an appearance of
Tera’s then-president) that Tera’s Bitcoin Swaps
had been traded the day before.
13
14
The CFTC found that, by this conduct, Tera
intended to create a false impression of actual
trading interest in the Bitcoin Swaps and violated
Section 4c(a) of the CEA, which prohibits market
15
16

Section 4c(a), 7 U.S.C. § 6c(a) (2012).
Tera Order at 5 (quoting Reddy v. CFTC, 191 F.3d
109, 115 (2d Cir. 1999)).
Tera Order at 6 (quoting Harold Collins, [1986-1987
Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶
22,982 at 31,902 (CFTC April 4, 1986), rev ‘d on
other grounds sub nom. Stoller v. CFTC, 834 F.2d 262
(2d Cir. 1987)).
Tera Order at 4-6.
  
The Tera Order did not impose any monetary
penalty against Tera.
offering “key consumer protection, anti-money
laundering compliance, and cyber security
guidelines.” 19
CFTC Commissioner Sharon Bowen dissented
from the Tera order, stating as follows: “I believe
fictitious trading deserves a penalty.
Tera
Exchange facilitated wash trading and prearranged
trading in violation of the Commodity Exchange
Act. That is why we brought this case. I
fundamentally disagree with the notion that they
deserve no penalty.” 17
On September 23, 2015, the NYDFS issued its
first BitLicense to Circle, allowing it to offer digital
currency services in New York. Circle already
possessed a state money-transmission license, and
accordingly is now licensed to offer a mobile
payment service capable of sending, receiving, and
holding both U.S. dollars and bitcoin. The mobile
payment service will allow users to send and
receive payments via text message without making
users convert into and out of bitcoin.
U.S. State Regulatory Developments
In a series of recent developments, U.S. state
banking regulators have also indicated that financial
regulatory requirements should extend to activity
involving bitcoin and other virtual currencies.
By Conrad Bahlke, a Partner, and Adam
Ghebrekristos, an associate, in the Corporate
Practice Group of Stroock & Stroock & Lavan
LLP, and Christopher Guhin, an associate, in
Stroock’s Litigation Practice Group
The CSBS opined on September 15, 2015 that
“activities involving third party control of virtual
currency, including for the purposes of
transmitting, exchanging, holding, or otherwise
controlling virtual currency, should be subject to
state licensure and supervision.” Accordingly, the
CSBS released a Model Regulatory Framework on
that date for State Regulation of Certain Virtual
Currency Activities. 18
For More Information
Prior to the release of this Model Regulatory
Framework, on June 3, 2015, the NYDFS
announced the release of its “BitLicense”
framework, which it described as “the first
comprehensive regulatory framework for firms
dealing in virtual currency such as Bitcoin”
17
18
Conrad G. Bahlke
212.806.6555
[email protected]
Marvin J. Goldstein
212.806.5629
[email protected]
Melvin A. Brosterman
212.806.5632
[email protected]
Mark N. Rae
212.806.5816
[email protected]
Scott Le Bouef
212.806.6662
[email protected]
Christopher Guhin
212.806.5552
[email protected]
Adam Ghebrekristos
212.806.6453
[email protected]
Commissioner Bowen’s dissent is available at
http://www.cftc.gov/PressRoom/SpeechesTestimon
y/bowenstatement092415.
The CSBS model framework is available at
https://www.csbs.org/regulatory/ep/Documents/CS
BS-Model-RegulatoryFramework(September%2015%202015).pdf.
19

The NYDFS’ announcement of its approval of
Circle’s
BitLicense
is
available
at
http://www.dfs.ny.gov/about/press/pr1509221.htm.
  
New York
 Maiden Lane
New York, NY -
Tel: ..
Fax: ..
Los Angeles
 Century Park East
Los Angeles, CA -
Tel: ..
Fax: ..
Miami
Southeast Financial Center
 South Biscayne Boulevard, Suite 
Miami, FL -
Tel: ..
Fax: ..
Washington, DC
 K Street NW, Suite 
Washington, DC -
Tel: ..
Fax: ..
www.stroock.com
This Stroock Special Bulletin is a publication of Stroock & Stroock &
Lavan  ©  Stroock & Stroock & Lavan . All rights
reserved. Quotation with attribution is permitted. This Stroock
publication offers general information and should not be taken or
used as legal advice for specific situations, which depend on the
evaluation of precise factual circumstances. Please note that
Stroock does not undertake to update its publications after their
publication date to reflect subsequent developments. This Stroock
publication may contain attorney advertising. Prior results do not
guarantee a similar outcome.
Stroock & Stroock & Lavan LLP, with more than 300 attorneys
in New York, Los Angeles, Miami and Washington, DC, is a law
firm providing transactional, regulatory and litigation guidance to
leading financial institutions, multinational corporations,
investment funds and entrepreneurs in the U.S. and abroad. Our
emphasis on excellence and innovation has enabled us to maintain
long-term relationships with our clients and made us one of the
nation’s leading law firms for almost 140 years.
For further information about Stroock Special Bulletins, or other
Stroock publications, please contact Richard Fortmann, Senior
Director-Legal Publications, at ...