The US Commodity Futures Trading Commission (CFTC) has charged Bitcoin derivatives platform Tera Exchange for failing to enforce prohibitions against circular trading schemes.
According to the CFTC, wash trading and prearranged trading were conducted between counterparties on its platform without intervention.
In wash trading, a trader takes a position (e.g. buy) in the market through one access point, such as a broker, and takes an opposite and offsetting position (e.g. sell) through another. In prearranged trading, two counterparties partake in a trade with the mutual agreement to subsequently conduct a reverse trade to offset the first.
Both trades are illegal in CFTC-regulated venues and elsewhere, and are prohibited according to Tera's own rulebook. Such trades give a false impression of activity to other market participants and can be employed to manipulate prices for unfair gain.
Tera Exchange's platform for bitcoin-based swaps was approved by the CFTC roughly one year ago. It is currently a provisionally registered Swap Execution Facility (SEF).
In October last year, Tera allegedly allowed "the only two market participants authorized at that time to trade on Tera’s SEF" to enter into a non-deliverable forward contract based on the BTC/USD rate. Two offsetting transactions were executed for the same notional amount, price, and tenor.
Tera allegedly brought the two participants together, telling one that the trade would be "to test the pipes by doing a round-trip trade with the same price in, same price out, no custodian required." The startup then allegedly issued a press release and made statements at the CFTC’s Global Markets Advisory Committee (GMAC) announcing the transactions, giving the impression of genuine trading interest in contracts on its platform.
The charges by the CFTC against Tera were simultaneously settled, with the regulator requiring that the platform cease and desist from future violations.
Greater Involvement in Bitcoin
The action is the second taken by the regulator on bitcoin in the span of a few days. It recently settled with an unregistered provider of bitcoin options, ruling that bitcoin is a commodity, and therefore derivatives based on it fall under CFTC oversight.
Last November, the regulator’s Commissioner, Mark P. Wetjen, went as far as suggesting that the agency has the authority to take action against price manipulation of bitcoin- even spot prices, without contracts. He argued that the CFTC’s definition of a commodity is broad enough to include bitcoin.
By the same token, however, the body does appear open to recognizing more bitcoin platforms. It recently granted temporary registration to bitcoin options platform LedgerX as an SEF. In a statement, LedgerX indicated that it will take the route of not launching its offering until it obtains both an exchange and clearing registration.
