Recently, the U.S. Commodity Futures Trading Commission (“CFTC”) granted LedgerX, LLC, registration as a derivatives clearing organization (“DCO”) under the Commodity Exchange Act, and with it, the right to clear fully collateralized digital currency swaps, subject to applicable law. It became the “first federally regulated Bitcoin options exchange and clearinghouse to list and clear fully-collateralized, physically-settled Bitcoin options for the institutional market.” LedgerX announced stringent trading rules on its website, embracing the CFTC regulations. Yet, right before its planned launch later this month, the CFTC announced another first — an anti-fraud enforcement action against alleged Bitcoin fund fraudsters.
The seemingly unrelated enforcement action announced on Thursday was against Nicholas Gelfman and Gelman Blueprint, Inc. in the Southern District of New York, “charging them with fraud, misappropriation, and issuing false account statements in connection with solicited investments in Bitcoin, a virtual currency.” The CFTC alleges that the defendants created a Ponzi scheme between January 2014 and January 2016 in which they stole more than $600,000 from approximately 80 people through fraudulent statements and faked performance reports. The defendants purportedly told these individuals that they were investing in a commodity pool that utilized the defendants’ proprietary “computer trading program called ‘Jigsaw.'” To prove the success of the investments, defendants allegedly sent these investors false reports showing positive performance of the funds, which in reality, defendants were simply using new investors’ funds to create false profits. Ultimately, the CFTC alleges, defendants staged a “hack” of the system to further conceal the conversion of investors’ money, and actual trading losses that are apparent from a review of the Jigsaw trading account.
The CFTC is seeking a variety of monetary and equitable relief for the violations both to pay back the defrauded investors and prevent the defendants from engaging in any future violations. The full complaint is available here.
The CFTC’s recent activities and increased activity on the part of the CFTC, both in permitting the LedgerX exchange to go forward, and in beginning to fight fraud in the digital currency space, is notable. It is a signal that the CFTC has determined that digital currencies are not going away anytime soon, and as such, it may as well do its best to “identify and remove bad actors from these markets” while promoting best practices for companies that engage in trading legally.