(Marilyn Nieves/E+/Getty Images, modified by CoinDesk)

​​Is Kraken’s Settlement With the CFTC Actually Bullish?

With CFTC Commissioner Dawn Stump’s corresponding call for her agency to provide more regulatory clarity, many say the enforcement action is actually a win for crypto.

September 29, 2021

This episode is sponsored by NYDIG.

Today on “The Breakdown,” NLW looks at the $1.25 million settlement Kraken just finalized with the Commodity Futures Trading Commission, which accused the crypto exchange of offering margin lending products without the proper licensing. Many noted the small size of the settlement suggested a more lenient CFTC. More important, however, was CFTC Commissioner Dawn Stump’s concurring statement, which called upon her colleagues to replace the current guidance - nearly four years old in concept at this point - with real, formalized rules.

Also today on the Brief:

  • Elizabeth Warren lambastes Fed Chair Jerome Powell
  • A positive new crypto mining bill from a bipartisan source
  • Ripple launches a $250 million NFT fund

“The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Tidal Wave” by BRASKO. Image credit: Marilyn Nieves/E+/Getty Images, modified by CoinDesk.


What’s going on guys? It is Wednesday, September 29 and today we are talking about crack ins just announced settlement with the CFTC and why it might actually be bullish. First up, however, let’s do the Brief. First on the Brief today, Elizabeth Warren likes Jerome Powell about as much as she likes cryptocurrencies. Powell, along with Yellen, testified before the Senate Banking Committee yesterday, as part of a requirement for these Maine officials to come in and talk to Congress in the Senate at a regular clip in the wake of last year’s unprecedented central bank involvement in the economy. There was a lot of discussion, which will probably make it to other shows this week, including Yellen’s intent to go after unrealized capital gains, but the fireworks yesterday were mostly from Elizabeth Warren. Warren accused Powell of watering down post financial crisis bank regulations. She said: “Your record gives me grave concerns. Over and over you have acted to make our banking system less safe, and that makes you a dangerous man to head up the Fed, and it’s why I will oppose your renomination.”

That “dangerous man” line is the one that’s making all of the press and all of the social media, but this is the first time that Warren has come out publicly and said that she will oppose Jerome Powell renomination. As I was discussing yesterday, Powell’s term is up in February and there is rampant speculation about whether President Biden will nominate him for another, or perhaps choose someone else; with Lael Brainard, another Fed official, being the most commonly suggested. Warren continued: “So far, you’ve been lucky. But the 2008 crash shows what happens when luck runs out. The seeds of the 2008 crash were planted years in advance by major regulators like the Federal Reserve that refuse to rein in big banks. I came to Washington after the 2008 crash to make sure nothing like that would ever happen again.” On the one hand, I suppose it’s nice for someone in the Congress or Senate to be sort of holding accountable these unelected officials. At the same time, it’s so hard not to see Elizabeth Warren’s political questing, especially now that we’ve seen how she’s just willing to apply the same rhetoric, the same narratives to our crypto industry, even though it’s such a different space. Either way, this is the thing that happened, so there’s the brief on it.

Next up on the Brief today, a new positive mining bill? Two senators are asking the U.S. Department of the Treasury to look into crypto mining around the world, but with an eye to U.S. competitiveness. The bill is created by Maggie Hassan, a Democrat from New Hampshire and Joni Ernst, a Republican from Iowa. If this bill was passed, Treasury would have to write up a report within two years of its passing, focused on mining and the impact of mining on supply chains in areas such as semiconductors. Also, and this is a quote from The Block: “The study would also assess the political frameworks mining intensive countries used for the industry. To compare, the study would also assess the types and dollar values of cryptocurrency mined within American and Chinese borders from 2016 to 2022, as well as any other countries the Treasury finds relevant.” Maggie Hassan’s statement on this said: “In order to strengthen U.S. competitiveness, our government must get a better handle on the role that cryptocurrency is playing in the global economy and how it is being leveraged by other countries. This I see as out-and-out positive, it’s basically a Democrat and a Republican coming together, bipartisan, to say we should learn more about this, not because we think we probably need to ban it, but because we think it’s probably a pretty important thing for the global economy going forward. And we want to know where we stand relative to our competitors. I think that the more that Bitcoin and cryptocurrency in general remains a bipartisan issue, something that doesn’t easily fit into the old food fights, the better it’s going to be for all of us.

Last on the Brief today, one that I would not have expected to be bringing to you but here we are. Ripple is launching a $250 million NFT fund. Now, Ripple, if you’ve been watching these guys for the last four years or whatever it’s been, they’ve always, always, always, always focused on their cross border payments, their remittances, all that sort of stuff, that sort of infrastructure as their thing: what they offered that was different. This is something of a pivot, or at least an opportunistic expansion into NFTs. They have a few partners for the initiative, including Mintable, and mintNFT, as well as the brand agency VSA Partners. It seems that they’re trying to grab the environmentally-friendly NFT narrative, but I actually don’t particularly care about the specifics of this deal or this initiative. I think that in the long run, to the extent that NFTs continue to be a thing, they’re going to obliterate chain allegiances, and it will be the collector communities that determine legitimacy, regardless of which chains things were initially minted on. I share this Ripple news because I think it relates to our main topic, and here’s a Travis Kling tweet that connects the dots: “We got Ripple out here punting 250 bucks into NFTs and Kraken catching couch-cushion fines, but tell me again about how U.S. regulators are getting ready to shut all of crypto down.”

Let’s shift to our main story. There has been a ton of speculation that we’re going to see some enforcement actions soon. And there’s a reason for that. It’s the end of a lot of these agencies’ fiscal years, these agencies seem to be commenting more and more and more, certainly the SEC is making it a point to talk about crypto more and more and more. And yesterday, we actually got one, although it doesn’t really seem that bad. U.S. exchange Kraken is paying a $1.25 million fine to the CFTC. Here’s what Compound General Counsel and overall crypto legal expert Jake Chervinsky had to say about it. “Enforcement actions are usually bad news, but this seems quite positive. Kraken made a good deal and solved an open regulatory issue, CFTC got a win in asserting its authority, and Commissioner Stump wrote a good statement calling for clarity. I have to think everyone’s happy with this one.” The accusation was that Kraken had violated the commodities Exchange Act. How: by offering margin crypto products between June 2020 and June 2021, without registering as a designated contract market, or DCM, or a futures commodity merchant, an FCM. From the CFTC: “During the relevant period, Kraken offered potential and existing U.S. customers the ability to enter into margin retail commodity transactions on its exchanges. Margin trading was available to any U.S. person who Kraken approved for a user account, the margin was up to five to one.” Under the settlement with the CFTC, Kraken will pay $1.25 million within 30 days, they will cease to offer margin product to U.S. persons and they waive their rights to hearings and court review.

So, what’s Kraken’s take on this? Well, Kraken had “sought clarity around CFTC margin trading guidance and began proactively limiting margin products in June 2021.” With the settlement, they wrote: “We appreciate that today’s settlement acknowledges our cooperation and engagement on the issue. We are committed to working with regulators to try to ensure the rules governing digital assets create a level playing field globally, one that allows the crypto space in the U.S. to flourish while protecting the interests of individuals and the integrity of the industry.” But, there is a larger issue, which is that there isn’t really a lot of clarity to be had. The most interesting thing to come out of this is CFTC Commissioner Dawn Stumps’ concurring statement. Basically the TLDR of this is that I agree with this decision, but we’ve given some guidance, but we need to be clear. The guidance she’s referring to is the final interpretive guidance on retail commodity transactions involving certain digital assets issued in 2020. As she points out, this was adopted two and a half years after the proposal, and it’s now been another year and a half.

In her statement she writes: “In the rapidly developing world of digital assets, two years is a lifetime. And yet now, here we are an additional year and a half later still, as the guidance becomes increasingly relevant to the Commission’s enforcement program, I believe it is incumbent upon the commission to undertake a rulemaking proceeding to supersede the guidance by adopting binding and enforceable rules that will provide certainty to the marketplace and a shared understanding of the ‘rules of the road.’”She goes on to point out the things are just blurry. Here’s her statement about Kraken’s registration: “The Commission finds Kraken violated CEA Section 4a because it engaged in retail commodity transactions that are prohibited by the CEA, unless traded on are subject to the rules of a DCM, a registration designation that has neither been requested by, nor granted to, Kraken. But it also finds that Kraken operated as an unregistered FCM, with respect to those transactions, which begs the question, if Kraken had sought to register with the commission as an FCM, how would it have been expected to operate? Absent these transactions occurring on a DCM, they would continue to be illegal even if cracking had an FCM registration. Furthermore, how Kraken would be regulated as an FCM is not entirely clear, because many of the Commission’s rules governing its regulation of traditional FCMs did not fit Kraken’s role as an exchange, it would also be unprecedented for an entity to register as both a DCM and an FCM.”

So as you can see, they’re basically falling over themselves, saying that if they had gone one direction, they would have run afoul of the other direction. If they had gone the other direction, they would have run afoul of the first direction, but it’s unprecedented to run in both directions as one, so what the hell is Kraken supposed to do? She continues: “In short, the application of the Commission’s FCM rules to an exchange on which retail commodity transactions are traded is uncharted territory at this time. I agree that Kraken’s activities meet the definition of an FCM set out in the CEA, and that Kraken thus operated as an FCM without registering as such, though I would note this is a rather broad interpretation of the definition beyond the traditional application. I believe that if the commission is going to hold an exchange liable for operating as an unregistered FCM, with respect to retail commodity transactions, it is incumbent upon the commission to explain in a transparent manner the relevant legal requirements for such an entity that seeks to register as an FCM and how the commission will apply them in enabling the entity to conduct business with U.S. customers.”

It’s a mouthful, but let’s read this last line again: “I believe that if the commission is going to hold an exchange liable for operating as an unregistered FCM with respect to retail commodity transactions, it is incumbent upon the commission to explain in a transparent manner the relevant legal requirements for such an entity that seeks to register as an FCM and how the commission will apply them in enabling the entity to conduct business with U.S. customers.” This is why people like Jake Chervinsky are convinced that this is actually bullish. That statement from Commissioner Stump could not stand in more opposition to the SEC, who continues to refuse to offer guidance other than in enforcement actions, and which continues to insist that how he tells you everything you need to know about how securities laws should be applied to cryptocurrencies. The CFTC is basically saying ‘if we’re going to regulate people under these rules, we have to explain to them how it’s going to work, and we have to figure it out for ourselves first.’ A few more takes from Twitter, Alex Krüger wrote: “$1.25 million. What does that princely sum tell you?” Ryan Selkis writes: “Kraken paying $1.25 million in a CFTC settlement is the regulatory equivalent of putting a quarter in a jar for swearing, you get accused of doing something bad with zero actual harm, drop a coin, all good. These are the 11th hour regulatory news items? Crypto must not be so bad.” Now less, there’s no wood to knock on around you wherever you are, I’m not convinced that this will be the last 11th hour regulatory news item we’ll see.

But the point still stands that this really isn’t that bad. And in fact, it has indications that could be very good. Now one last note, speaking of the SEC and the CFTC, I mentioned previously that CFTC Commissioner Dan Berkovitz was leaving the CFTC. My attitude was a bit of ‘Don’t let the door hit you on the way out,’ given his attack on the industry over the summer. Well, guess where he’s headed? That’s right. The SEC. Dan Berkovitz will become the new General Counsel of the SEC starting November 15. The Office of the General Counsel manages the SEC’s litigation efforts, it makes recommendations on enforcement actions rulemaking, an interagency activity. Listen, the optimistic take is that Dan is very pro-compliance and pro-rules so, maybe he’ll actually articulate some of those rules rather than just screaming how he reads over and over again, at least we can hope. For now, I hope you’re having a great week. I appreciate you listening and until tomorrow, be safe and take care of each other. Peace!