Falcon Labs Settles with CFTC in Landmark Case Over Unregistered Status

The Commodity Futures Trading Commission (CFTC) has reached a settlement with Falcon Labs, Ltd., a Seychelles-based entity, for operating as an unregistered futures commission merchant (FCM) and facilitating access to digital asset exchanges without proper registration.

CFTC Settlement Terms and Fines Against Falcon

.@CFTC Issues Order Against #Crypto Prime Brokerage Firm for Illegally Providing U.S. Customers Access to Digital Asset Derivatives Trading Platforms: https://t.co/UeKHaNsXzi

— CFTC (@CFTC) May 13, 2024

Under the settlement terms, Falcon Labs must cease acting as an unregistered FCM, particularly in providing US individuals access to digital asset derivatives trading platforms. Additionally, Falcon Labs has been ordered to pay $1,179,008 in disgorgement and a civil monetary penalty of $589,504.

The reduced penalty reflects Falcon Labs’ extensive cooperation with the CFTC’s Division of Enforcement throughout the investigative process.

Ian McGinley, the CFTC’s Director of Enforcement, emphasized the agency’s unwavering commitment to upholding integrity in derivatives markets, particularly in the digital asset space. He said,

“The CFTC’s enforcement program has made clear it will not tolerate digital asset exchanges that fail to register with the CFTC or comply with the agency’s rules that maintain integrity in the derivatives markets.”

McGinley highlighted the CFTC’s determination to hold accountable any entities, whether exchanges or intermediaries, that provide access to digital asset products and services without appropriate registration.

As an intermediary, Falcon Labs facilitated customer trading on various digital asset exchanges, including institutional customers within the US. The company provided direct access to exchanges by creating main accounts in its name and establishing associated sub-accounts, often without requiring or providing customer-identifying information.

Throughout this period, Falcon Labs amassed net fees totaling approximately $1,179,008 from customers engaging in digital asset derivative transactions intermediated by the company.

Notably, Falcon Labs took voluntary steps to enhance its customer identification controls following the CFTC’s complaint against entities associated with Binance, which shed light on similar practices involving sub-accounts for U.S.-located customers trading digital asset derivatives.

CFTC is Mostly Having Its Way

In last year’s precedent-setting decision, a US district judge ruled in favour of the US CFTC in its litigation against Ooki DAO, ordering the organization to pay a civil penalty of $643,542 and cease operations in the US. The court’s ruling establishes that DAOs can be held liable for violating the law, challenging the notion that their decentralized structure insulates them from legal consequences.

The background of DAOs reveals them as organizations operating based on blockchain rules and smart contracts, enabling decentralized decision-making without a central authority. The case of Ooki DAO last year has echoed broader regulatory trends, as evidenced by the US Securities and Exchange Commission’s subpoena of Sushi DAO, another decentralized organization behind a crypto exchange.

With this recent landmark settlement, the CFTC seeks to encourage other digital asset intermediaries operating unlawfully to come forward and report their activities as required. Director Ian McGinley said,

“In recognizing Falcon Labs’ substantial cooperation and remediation in this order in the form of a lower penalty, the CFTC hopes to encourage other digital asset intermediaries operating illegally to come forward and report their activities to the agency.”