The Commodity Futures Trading Commission (CFTC) took action against Falcon Labs Ltd. for operating as an unregistered Futures Commission Merchant (FCM) and providing U.S. customers access to digital asset derivatives trading platforms without the required registration. This is the first instance of the CFTC targeting an intermediary for such violations.

Case Background
Falcon Labs offered a product called “Edge,” providing institutional customers, including U.S. clients, with direct access to digital asset exchanges for trading derivatives. They created main accounts on exchanges and sub-accounts for customers, allowing trading without disclosing customer identities. This practice generated significant revenue from U.S. customers.

Findings and Violations
From October 2021 to March 27, 2023, Falcon Labs solicited and accepted orders for digital asset derivatives from U.S. customers. Acting as an intermediary, Falcon Labs provided direct access to digital asset exchanges but failed to register as an FCM, violating Section 4d(a)(1) of the Commodity Exchange Act (CEA). They also did not disclose customer identities to the exchanges, further breaching regulatory requirements.

According to the CEA, any entity that accepts orders for futures or swaps and accepts money to margin trades must register as an FCM. Falcon Labs’ activities fit this definition, making their unregistered status a clear violation. 

Enforcement and Compliance
The CFTC’s action against Falcon Labs sets a precedent for enforcing compliance among intermediaries. By cooperating with the investigation and enhancing their customer identification processes, Falcon Labs received a reduced penalty. This cooperation included improving their Know-Your-Customer (KYC) procedures and off-boarding non-compliant customers.

Penalties and Settlement
Falcon Labs agreed to cease its unregistered activities and pay $1,179,008 in disgorgement and a $589,504 civil monetary penalty. These penalties reflect the profits made during the violation period and the reduced amount due to Falcon Labs’ cooperation and remediation efforts. They also committed to fully cooperating with the CFTC in any related investigations or proceedings.

For businesses operating in the digital asset market, this case is another wake-up call. It shows just how crucial it is to be properly registered and to follow CFTC regulations. If your company is taking orders for digital asset derivatives from U.S. customers, you need to be registered as a Futures Commission Merchant (FCM). Not doing so can lead to hefty fines and legal actions.

Falcon Labs’ situation also teaches an important lesson: cooperating with regulators and improving compliance can help reduce penalties. It’s a good idea for businesses to take a hard look at their practices and strengthen their compliance programs. By doing so, you can avoid similar pitfalls and ensure you’re meeting all regulatory requirements.