Today, a federal district court will begin to consider the application of insider trading jurisprudence to digital assets or, more specifically, cryptocurrencies.

While conversations regarding the regulation of this emerging and novel asset class may invite lively (and in some instances passionate) debate, there is one issue about which crypto enthusiasts and skeptics may agree—fraud, misrepresentation, and deception or lying, cheating, and stealing—are not be permitted. Our commitment to enforcing against such conduct rises to singular and critical importance when fraudsters intentionally target vulnerable retail market investors.  Existing laws and regulations expressly prohibit such misconduct in our markets for good reason.  Financial market regulators and law enforcement stand united, prepared to enforce against such predatory and abusive behavior.

Simply stated, certain values and principles are deeply embedded in the statutes, regulations, and jurisprudence that govern our markets.  These values and principles aim to protect market participants, including retail customers with limited resources (particularly those who may face fragile financial circumstances), and preserve the integrity of our preeminent financial markets.

Insider trading jurisprudence has engendered many celebrated legal decisions that enhance enforcement against insider trading—Chiarella v. United States; Dirks v. SEC; United States v. O’Hagan.  We must continue to work collaboratively to adopt a whole-of-government approach to prevent bad actors from taking advantage of important policy and regulatory debates and to ensure the protection of retail investors and preservation of the safety and soundness of our financial system.

“[I]n the words of Federalist No. 49, ‘The people are the only legitimate fountain of power, and it is from them that the constitutional charter . . . is derived.' Government is and should be the servant of the people, and it should be fully accountable to them for the actions which it supposedly takes on their behalf.” (H.R. Rep. No. 94-880 (Pt. 1), reprinted in 1976 U.S.C.C.A.N. 2183, 2184).

The case SEC v. Wahi is a striking example of “regulation by enforcement.”  The SEC complaint alleges that dozens of digital assets, including those that could be described as utility tokens and/or certain tokens relating to decentralized autonomous organizations (DAOs), are securities.

The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together.  Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input—through notice-and-comment rulemaking pursuant to the Administrative Procedure Act.  Regulatory clarity comes from being out in the open, not in the dark.

Twelve years ago on this day, the Dodd-Frank Act became law.  Since that time, the CFTC has faithfully carried out its expanded anti-fraud mission and has aggressively pursued wrongdoing in every one of our markets and all over the world.  Given the overriding public interest and the open questions on the legal statuses of various digital assets, such as certain utility tokens and DAO-related tokens, the CFTC should use all means available to fulfill its statutory mandate to vigorously enforce the law and uphold the Commodity Exchange Act.  This responsibility has been entrusted to us by the Congress and the American people.  The CFTC must not break that trust, and we must remember whom we serve.

This registration order reflects the staff’s efforts to address my concerns with respect to staff no-action letters of general applicability and the requirements under the Administrative Procedure Act.[1] I appreciate the diligent work by the Division of Market Oversight and the Legal Division. 

I believe that Commission action—not delegated staff action—is required to properly amend or repeal existing Commission regulations.  Accordingly, I believe it is more appropriate to impose direct conditions in an order of registration—rather than indirect conditions incorporated by reference to a staff no-action letter—because the order, at least, has been approved by Commission action requiring an affirmative vote of the majority of the Commission.  It would be even more appropriate to utilize the Commission’s rulemaking authority[2] or exemptive authority[3] to provide relief from rule requirements. 

It has been over 10 years since the Dodd-Frank Act was passed.   We must finally take action to fix unworkable rules by codifying “perpetual” no-action relief through notice-and-comment rulemaking as required by the Administrative Procedure Act. We must be as demanding on ourselves as we are on our registered entities and registrants—we must put in the hard work to comply with the letter of the law.

[1] Administrative Procedure Act, 5 U.S.C. § 553(b) (2006).

[2] See 7 U.S.C. § 12a(5).

[3] See 7 U.S.C. § 6(c).

I respectfully dissent from the Commission’s enforcement action charging, and settling with, Powerline Petroleum, LLC (“Powerline”) and its current principals, Darren Dohme and Adam Wright.  As a matter of law, I do not believe that all the charges are backed by the facts.  I also believe that some aspects of the settlement are inconsistent with the Commission’s prior treatment of similar cases and fundamentally unfair.

I agree that we need to be strong on enforcement and, at the CFTC, we are.  But what can be much harder for regulators – yet just as vital to the long-term success of our mission – is to exercise our enforcement powers in a fair and even-handed manner, consistent in the charges we bring and the sanctions we impose.  It is here that I believe the Commission has fallen short in this case.

The Powerline Story

There is more to tell about the Powerline story than is set out in the Commission’s settlement Order.  Powerline is a small business, historically employing somewhere between 2-10 employees.  Its clients are primarily retail gas station operators that regularly hedge their exposure to fluctuating energy prices using fuel-related futures. 

Powerline has been doing business for nearly 20 years, and has been registered with the Commission as an Introducing Broker (“IB”) since its founding (except for a relatively brief period during which a registered Futures Commission Merchant (“FCM”), with which Powerline maintained a long-standing relationship, owned and operated the business). Pursuant to the Commodity Exchange Act (“CEA”), an IB engages in soliciting or in accepting orders for certain derivatives transactions, and does not accept money or property to margin any trades or contracts that result therefrom.[1]  Darren Dohme, a founder of Powerline and Adam Wright, his co-owner, are both registered as Associated Persons (“APs”)[2] subject to the regulatory rules and responsibilities associated with this registration.

Importantly, Powerline has enjoyed a clean history as a registered IB and its employees as registered APs.  The Commission has found no fault with Powerline’s conduct of its IB business at any time, and the Commission’s settlement Order does not contain any finding of wrongdoing with respect to Powerline’s IB activities.

The Case Against Powerline

At times, though, Powerline undertook activities that extended beyond those of an IB and into those that characterize a commodity trading advisor (“CTA”) under the CEA.  That is, Powerline acted as a CTA by advising others, for compensation or profit, as to the value of or the advisability of trading in certain derivatives contracts.[3]  But while it remained registered as an IB, Powerline did not also register as a CTA, nor did it provide certain disclosures to clients that CTAs (and firms that are required to register as a CTA) must provide.  And when the Chicago Mercantile Exchange (“CME”) initiated an investigation in 2019 regarding Powerline’s activities, Powerline (through Dohme and Wright) produced to CME a backdated letter suggesting that Powerline provided a written disclosure to its clients earlier than was actually the case – a fact that Powerline brought to the attention of our Division of Enforcement in its cooperation with the investigation (which the Commission recognizes in the settlement Order).

The Commission’s settlement Order finds, among other things, that:  1) Powerline unlawfully acted as an unregistered CTA,[4] and also violated disclosure requirements for CTAs (including firms required to register as a CTA) in the Commission’s rules (collectively referred to herein as the “CTA Violations”);[5] and 2) Powerline, Dohme, and Wright made a false statement that violated the CEA when they produced the backdated letter to CME.[6] 

I have no question that Powerline, Dohme, and Wright made a false statement to CME with the backdated letter.  In fact, they disclosed this violation themselves, and I support any and all penalties associated with this violation. 

However, I am not sure the record justifies the Commission’s findings that Powerline committed the CTA Violations.  After all, our rules provide that a registered IB need not also register as a CTA if its trading advice is “solely in connection with its business as an introducing broker” (the “IB Exemption”).[7]  Based on the information available to me, it appears that:  1) on trades resulting from Powerline’s CTA services, Powerline acted as an IB by introducing the trades to an FCM for execution; 2) much (though not all) of the revenue that Powerline earned from its markups occurred on two dates, one in 2016 and one in 2017; and 3) even in those years, Powerline’s revenues from its CTA activities did not account for more than 50% of its total revenues, and in other years it was minimal (e.g., under 1% in 2015 and under 5% in 2018). 

Equally concerning to me is the fact that throughout Powerline’s history as an IB, it was subject to examination by the National Futures Association (“NFA”) – the registered futures association for the derivatives industry – but the record contains no indication that NFA ever suggested that Powerline might also have to register as a CTA.  Nor did the registered FCM that owned and operated the Powerline business for a few years ever suggest that it might be necessary for Powerline to register as a CTA.  Under these circumstances, whether Powerline qualified for the IB Exemption to the requirement to register as a CTA certainly warrants more than the cursory, and conclusory, statement in the Commission’s settlement Order that Powerline’s “advisory business was not solely in connection with its brokerage business.”[8] 

We Have Seen This Case Before

I recognize, though, that the Commission has previously found the CTA Violations to have occurred in a case with facts strikingly similar to those present here.  In a 2016 settlement Order involving a company called Angus Energy (“Angus”), the Commission found that Angus had unlawfully acted as an unregistered CTA and violated the same CTA disclosure rules that the Commission now finds Powerline to have violated.[9] 

Comparing the settlement Orders regarding Powerline and Angus reveals that:  1) the clients of the advisory services provided by both companies were retailers of fuel products; 2) both companies advised clients on hedging programs for energy markets; 3) both companies acted as counterparty to their clients in certain derivatives contracts, but did not clearly disclose that to their clients; 4) both companies charged and retained a markup embedded in the price charged to clients, but did not disclose the existence or amount of the markup; and 5) the wrongdoing identified by the Commission in both cases occurred during an overlapping 4-year period.[10] 

Given these parallel facts and the Commission’s findings of CTA Violations by Angus, I can understand the Commission’s findings that Powerline committed the CTA Violations, too.  But what I can neither understand nor accept is the Commission’s determination to treat Powerline more harshly than it did Angus.[11]  In particular, the Commission:

• Dresses up Powerline’s disclosure failures as fraud, whereas no fraud charge was brought in the Angus case despite the similarity of its facts;
• Charges Dohme with individual liability for the CTA Violations, whereas no individuals at Angus were charged;
• Imposes disgorgement of $500,000 against Powerline, whereas no disgorgement was ordered against Angus; and
• Imposes registration and trading bans of 3 and 6 months, respectively, on Powerline, Dohme, and Wright, whereas no registration or trading bans were imposed on Angus.

Fundamental Fairness

Similar cases should be treated similarly.[12]  The settlement Order regarding Powerline does not even mention the Angus case, let alone explain the disparities in the settlement terms in the two cases.  It is neither fair nor just for the charges brought, and the sanctions imposed, by the Commission in similar cases to fluctuate as we see demonstrated here. 

Powerline, Dohme, and Wright would hardly be getting off “scot-free” if the Commission treated their settlement the same way it treated its settlement with Angus with respect to the CTA Violations.  The Commission is holding them accountable by imposing a civil monetary penalty (“CMP”) of $375,000, with the joint and several liability of Dohme and Wright capped at $150,000 each.  In comparison to the $250,000 CMP imposed on Angus, this is appropriate given the additional false statement violation here. 

Further, Dohme and Wright will have their names – as well as their company’s name – publicly identified in a Commission press release distributed in the national media, leaving a permanent mark on their reputations.  The Commission’s findings of their misconduct also will be flagged (as they should) in the registration database maintained by the NFA, so that potential future customers can consider the information when making their trading decisions (as they should).  At a small company, reputation is everything. 

But to treat the Powerline settlement so differently than the Angus settlement is fundamentally unfair.  This is best illustrated by the 3-month registration ban imposed on Powerline.  Not only does the ban prevent Powerline from registering as a CTA (which is appropriate, since that is where its infractions occurred), but it is imposed on Powerline’s existing IB registration, too – notwithstanding that Powerline has run a clean IB business for nearly 20 years, and the settlement Order makes no finding of any wrongdoing with respect to that IB business. 

Of course, three months doesn’t seem very long, and is shorter than the registration bans the Commission often imposes on wrongdoers.  But by applying that ban to Powerline’s IB registration, the impact may very well last much longer than three months.  In fact, the Commission risks shutting down Powerline’s business entirely.  Powerline’s retail gas station customers will still need IB services during the term of Powerline’s registration ban, and can be expected to find them elsewhere.  How many are likely to return after the ban expires? 

I also want to be sure to mention Powerline’s other employees who may be directly and adversely impacted by the Commission’s ban on Powerline’s IB registration.  These employees, whom the Commission is not charging with any wrongdoing, rely on the pay and benefits offered by Powerline.  If Powerline is not able to do business as an IB for even three months, its status as an employer is surely at risk. 

To me, this is inherently unfair, and on principle, I cannot support this settlement, even when entered into voluntarily.  This may strike some as a small case compared to the actions against major Wall Street banks and global commodity trading firms that can be a steady part of our enforcement program.  But in my view, it is precisely when our enforcement actions involve smaller registrants – where our actions can threaten livelihoods, the survival of a business, and the jobs of taxpayers – that we should proceed with extreme caution.  I respectfully dissent from the Commission’s failure to do so here.

[1] CEA Section 1a(31), 7 U.S.C. § 1a(31).

[2] The CEA defines an AP, among other things, as an employee associated with an IB in a capacity that involves the solicitation or acceptance of customers’ orders (other than in a clerical capacity).  CEA Section 4k(1), 7 U.S.C. § 6k(1).

[3] CEA Section 1a(12), 7 U.S.C. § 1a(12).

[4] See CEA Section 4m(1), 7 U.S.C. § 6m(1).

[5] Specifically, the Commission’s settlement Order finds that Powerline recommended hedging programs to its clients without disclosing that Powerline would be the counterparty to the clients’ trades, and without disclosing the markup that Powerline received on those transactions.  It further finds that these failures violated the requirements in the Commission’s rules that a CTA (including firms required to register as a CTA) disclose a “complete description of each fee which the commodity trading advisor will charge the client” and a “full description of any actual or potential conflicts of interest regarding any aspect of the trading program . . .”  See CFTC Rules 4.31 and 4.34, 17 C.F.R. §§ 4.31, 4.34. 

[6] See CEA Section 9(a)(4), 7 U.S.C. §13(a)(4).

[7] CFTC Rule 4.14(a)(6), 17 C.F.R. § 4.14(a)(6). 

[8] Settlement Order at 2, 5, 7.

[9] In re Angus Partners, LLC, D/B/A Angus Energy, CFTC Docket No. 16-36 (September 29, 2016). 

[10] See Angus Settlement Order at 2-3; Powerline Settlement Order at 2-5.  The settlement Order in the Angus case is equally unenlightening as to why Angus did not qualify for an exemption from CTA registration, saying only that “Angus’s commodity trading advice was not solely incidental to its business” (which was the standard for exemption applicable to Angus’ cash commodity business pursuant to CFTC Rule 4.14(a)(1), 17 C.F.R. § 4.14(a)(1)).  See Angus Settlement Order at 2. 

[11] Treating Powerline more harshly than Angus is particularly hard to comprehend when it is considered that unlike Powerline, which subjected itself to regulation and examinations as a registered IB, Angus had not been registered with the Commission. 

[12] Public guidance published by our Division of Enforcement (“DOE”) provides that monetary and non-monetary relief in analogous cases is a factor to be considered in determining an appropriate civil monetary penalty.  See Civil Monetary Penalty Guidance at 4 (DOE May 20, 2020), available at CFTC Division of Enforcement Issues Civil Monetary Penalty Guidance | CFTC.  It should be considered by the Commission in all its charging and sanctions determinations. 

I support the Commission’s issuance of an Order of Registration (“Order”) regarding the application of AEGIS SEF, LLC (“Aegis”) to register as a swap execution facility (“SEF”).  The record before us demonstrates that Aegis, subject to conditions set forth in the Order, has demonstrated compliance with the Commodity Exchange Act and the Commission’s regulations, and therefore its registration as a SEF is appropriate.

But those who take a look at the Order may wonder why half of it is devoted to a discussion about SEF swap confirmations pursuant to Commission Rule 37.6(b)[1] and related regulations.[2]  I wish to make clear that this is not due to any deficiency on the part of Aegis.  Rather, it is due to a defect in the Commission’s rules.  A defect left on the books, despite the Commission’s awareness since 2014, requiring work-arounds and temporary no-action relief – the antithesis of regulatory clarity.   

The SEF Swap Confirmation Saga

Rule 37.6(b) requires that a SEF “provide each counterparty to a transaction that is entered into on or pursuant to the rules of the [SEF] with a written record of all of the terms of the transaction which shall legally supersede any previous agreement and serve as a confirmation of the transaction.”  When it adopted Rule 37.6(b), the Commission explained that, with respect to uncleared swaps, SEFs could satisfy the rule’s written confirmation requirement by incorporating by reference terms set forth in agreements previously negotiated by the counterparties,[3] provided that such agreements had been submitted to the SEF ahead of execution.[4]

There was just one problem:  The proviso that the SEF must obtain such documentation from the parties to an uncleared swap ahead of execution to incorporate into its confirmation simply was not workable.  As the Commission subsequently recognized, the proviso—

has created impractical burdens for SEFs.  Based upon feedback from SEFs, the Commission understands that SEFs have encountered many issues in trying to comply with the requirement for uncleared swaps, including high financial, administrative, and logistical burdens to collect and maintain bilateral transaction agreements from many individual counterparties.  SEFs have stated that they are unable to develop a cost-effective method to request, accept, and maintain a library of every previous agreement between counterparties.  SEFs have also noted that the potential number of previous agreements is considerable, given that SEF counterparties enter into agreements with many other parties and have multiple agreements for different asset classes.[5]

Cognizant that the Commission’s SEF confirmation rule does not work, Commission staff has done what it could.  Staff issued three conditional no-action letters during 2014-2016 to provide necessary relief; each letter expired after approximately one year.[6]  When the Commission still had not acted to address this issue by 2017, staff again extended the no-action relief “until the effective date of revised Commission regulations that establish a permanent, practicable SEF confirmation solution.”[7]

Fast forward five more years from 2017 to today, and “Commission regulations that establish a permanent, practicable SEF confirmation solution” are still nowhere in sight.  In fact, although the Commission has known for nearly a decade that its SEF confirmation rule is unworkable, a rulemaking to address the issue was unfortunately missing from the Commission’s “Agency Rule List” published in the Spring 2022 “Unified Agenda of Regulatory and Deregulatory Actions.”[8]

Enough is Enough

The Order we are approving regarding Aegis requires it to comply with the same conditions for swap confirmations that currently-registered SEFs must comply with to rely upon the existing no-action relief.  This is appropriate, in order to maintain a level playing field among SEFs.

But what is not appropriate is for the Commission to fail to fix the unworkable rule[9] while instead relying on patchwork band-aids such as the indefinite no-action relief that staff has properly granted to currently-registered SEFs, and bespoke conditions in an Order of Registration for new SEFs such as Aegis.  This inaction by the Commission is unfair to market participants, undermines the integrity of the Commission’s regulatory framework, and runs counter to a Core Value of the Commission – clarity through transparency to market participants about our rules and processes.[10]

Washington, D.C. — Today, the Commodity Futures Trading Commission (CFTC) announced that the Honorable John Koeltl of the U.S. District Court for the Southern District of New York entered a Consent Order and Permanent Injunction, Civil Monetary Penalty, and Other Equitable Relief Against Defendant Jimmy Gale Watson, Jr. of Dallas, Texas. This case marks the first enforcement action by the Commission alleging use of a traditional fraud scheme known as “pump-and-dump” in digital asset markets. In a pump-and-dump scheme, fraudsters spread false information about an asset in order to “pump-up” investor interest and drive up the price. The fraudsters then liquidate or sell the targeted asset, dumping the asset at the artificially inflated price before the price inevitably declines.

Ensuring appropriate customer protections and enforcing against fraudulent schemes like this one are core principles deeply embedded in the agency’s legal and regulatory framework, history, and ethos. Such fraudulent and manipulative schemes are particularly egregious when they target the most vulnerable market participants, here hardworking retail investors. With the rise in popularity of digital assets, many retail investors are lured by bad actors promising quick riches. Adding to these concerns, all-too-often these vulnerable investors rely on online communication platforms and chatrooms that serve as a gathering place for cryptocurrency enthusiasts and self-anointed (unregistered and often uncredentialed) investment advisors.

In 2018, the CFTC warned of the dangers of these types of schemes. The CFTC will continue to be vigilant in surveilling the digital assets ecosystem for fraud or manipulation that falls within the ambit of its regulatory authority. In this case, the Commission applied its broad anti-fraud and anti-manipulation authority to protect investors from further losses and to obtain appropriate sanctions against Defendant Watson. Specifically, the consent order requires Watson to disgorge all profits from the scheme and orders him to pay a civil monetary penalty in the same amount. In addition, Watson is permanently banned from trading in the derivatives markets and banned from registering with the CFTC. 

I am grateful for the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Securities Exchange Commission, which conducted separate and parallel investigations.

I would also like to commend the hard work and effort of the Division of Enforcement staff members who brought this matter to a resolution, including, David M. Oakland, Christopher Giglio, Alejandra de Urioste, K. Brent Tomer, Lenel Hickson, Jr., and Manal M. Sultan as well as former Enforcement staff member Gates Hurand. The Division’s Digital Assets Task Force assisted with this matter.

Today, the CFTC adds the names of 34 unregistered foreign entities to its Registration Deficient (RED) List. [See CFTC Press Release No. 8555-22]  The CFTC created the RED List in 2015 in an effort to increase transparency and identify foreign entities that may be operating in regulated markets without being properly registered.

In today’s global markets a foreign entity operating outside the United States may—with a few taps on a smartphone—reach potential U.S. customers through email, text message, IM, chat app, or social media, and solicit them to invest, transfer, or deposit funds, or otherwise transact via platforms created and maintained outside of the United States.  All too often, the CFTC has identified highly-organized fraudsters using these techniques and a perceived lack of oversight to prey on U.S. consumers.

Because they are not registered with the CFTC, customers engaged in transactions with these entities may not receive the benefit of the customer protections, safeguards, and guardrails long-adopted and deeply embedded in the CFTC’s oversight of the markets.  Transacting with unregistered entities, particularly those operating without such oversight and beyond our borders, may expose U.S. customers to significant and concerning risks.

The CFTC’s mission is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.  Requiring derivatives markets intermediaries—such as Retail Foreign Exchange Dealers, Introducing Brokers, Commodity Trading Advisers, and Commodity Pool Operators—to register with the CFTC and comply with the CFTC’s regulations offers one critical tool for accomplishing our mission.  Publishing the Red List alerts the public to entities soliciting U.S. customers without registering with the CFTC when registration may be required.

Other regulators, including the Securities and Exchange Commission with its Public Alert About Soliciting Entities (PAUSE), have adopted a similar approach.  Further, the International Organization of Securities Commissions (IOSCO) has established an Investor Alert Portal on its website to receive and publish alerts and warnings from its members about firms that are not authorized to provide investment services in the jurisdiction that issued the alert or warning.  Nearly 50 countries issue similar lists, warning letters, or public statements.

I commend the Division of Enforcement and the Office of Customer Education and Outreach for their efforts in publishing and maintaining the RED List.

Washington, D.C.— CFTC Commissioner Caroline D. Pham made the following statement today regarding international efforts to set standards for the regulation of stablecoins:

“Technological change has continued to transform markets, with the rise of digital assets and innovations such as stablecoin arrangements to provide transfer functions.  Today, the Bank of International Settlements' (BIS) Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued the report Application of the Principles for Financial Market Infrastructures to stablecoin arrangements.

More than a decade has passed since CPMI-IOSCO first published the Principles for Financial Market Infrastructures (PFMls) in the wake of the 2008 financial crisis. Since then, national authorities around the world, including the CFTC, have implemented the PFMls to ensure that there is a strong and consistent approach for the oversight of FMIs in order to mitigate systemic risk.

Especially in light of recent market events, I want to recognize the timely and important work of the CPMI and IOSCO in addressing how the PFMls may apply to systemically important stablecoin arrangements.  This report is a significant step to establish international standards for stablecoin arrangements and a cohesive regulatory framework that safeguards the global financial system.

I am pleased to see the CFTC's continued international leadership, including as co-chair of the CPMI-lOSCO Policy Standing Group, and would like to recognize in particular CFTC staff Kirsten V. K. Robbins, Bob Wasserman, Matt Jones, and Jason Mahoney.  I look forward to hearing from both the public and private sectors on the implications of this report and recommendations for further action."