Washington D.C. – The Commodity Futures Trading Commission (CFTC) has levied charges and reached settlements with Tom Bean, Kyle Kistner, and their company, bZeroX, LLC, for offering illegal leveraged and margined retail commodity transactions in digital assets. The actions, announced on September 22, 2022, allege violations of the Commodity Exchange Act (CEA) and CFTC regulations.
The CFTC alleges that bZeroX and its founders operated a decentralized blockchain-based software protocol, known as the bZx Protocol, which functioned as a trading platform without proper registration. Between June 1, 2019, and August 23, 2021, the protocol allowed users to engage in margined and leveraged trading of digital assets, effectively circumventing established regulatory requirements for futures commission merchants (FCMs). Crucially, the respondents failed to implement a customer identification program as mandated by Bank Secrecy Act compliance rules for FCMs.
As part of the settlement, bZeroX, Bean, and Kistner will pay a combined civil monetary penalty of $250,000 and are ordered to cease and desist from further violations. Simultaneously, the CFTC filed a separate federal civil enforcement action in the U.S. District Court for the Northern District of California against Ooki DAO – a decentralized autonomous organization that succeeded bZeroX and continued operating the same software protocol.
The complaint against Ooki DAO seeks restitution, disgorgement of ill-gotten gains, additional civil monetary penalties, trading and registration bans, and an injunction to prevent future violations. CFTC Chairman Rostin Behnam emphasized the agency’s commitment to pursuing those who attempt to evade regulatory oversight in the digital asset space, stating the case highlights concerns regarding the growing market. Acting Director of Enforcement Gretchen Lowe reiterated that margined and leveraged digital asset trading must occur on registered and regulated exchanges, a standard applying equally to traditional entities and DAOs.
The bZx Protocol allowed users to contribute margin (collateral) to open leveraged positions, with the value determined by the price difference of digital assets. The platform advertised itself as a decentralized environment, eliminating the need for third-party intermediaries to hold user assets. However, the CFTC asserts these transactions were unlawful as they were conducted outside of a designated contract market.
Source: CFTC.gov
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