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Falcon Labs Settles with CFTC in Landmark Case Over Unregistered Status

The Commodity Futures Trading Commission (CFTC) has finalized an agreement with Falcon Labs, Ltd., a company based in Seychelles, for engaging in activities as an unregistered futures commission merchant (FCM) and enabling access to digital asset exchanges without appropriate registration.

CFTC Settlement Terms and Fines Against Falcon

Under the settlement agreement, Falcon Labs is required to discontinue its activities as an unregistered FCM, specifically in granting access to digital asset derivatives trading platforms for U.S. individuals. Additionally, Falcon Labs has been instructed to remit $1,179,008 in disgorgement and a civil monetary penalty amounting to $589,504.

The reduced penalty reflects Falcon Labs’ substantial cooperation with the CFTC’s Division of Enforcement during the investigative phase.

Ian McGinley, the CFTC’s Director of Enforcement, underscored the agency’s steadfast dedication to preserving integrity within derivatives markets, particularly within the digital asset sector. He stated,

“The CFTC’s enforcement program has made it abundantly clear that it will not tolerate digital asset exchanges operating without registration or failing to adhere to the agency’s regulations aimed at safeguarding integrity in derivatives markets.”

McGinley emphasized the CFTC’s resolve to hold accountable any entities, be it exchanges or intermediaries, that offer access to digital asset products and services without proper registration.

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

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

Significantly, Falcon Labs voluntarily took steps to bolster its customer identification controls following the CFTC’s complaint against entities linked with Binance, which brought to light similar practices involving sub-accounts for U.S.-based customers trading digital asset derivatives.

CFTC is Mostly Having Its Way

In a precedent-setting decision last year, a US district judge ruled in favor of the US CFTC in its legal battle against Ooki DAO, mandating the organization to pay a civil penalty of $643,542 and cease its operations in the US. This court ruling establishes that DAOs can indeed be held accountable for legal violations, challenging the notion that their decentralized structure shields them from legal repercussions.

The concept of DAOs portrays them as entities functioning based on blockchain protocols and smart contracts, allowing for decentralized decision-making without a central governing body. The case involving Ooki DAO from last year mirrors broader regulatory patterns, exemplified by the US Securities and Exchange Commission’s scrutiny of Sushi DAO, another decentralized entity associated with a cryptocurrency exchange.

With this recent significant settlement, the CFTC aims to incentivize other digital asset intermediaries operating unlawfully to step forward and disclose their activities as mandated. Director Ian McGinley remarked,

“By acknowledging Falcon Labs’ extensive cooperation and corrective measures in this ruling through a reduced penalty, the CFTC seeks to motivate other digital asset intermediaries engaging in illegal activities to come forward and report their actions to the agency.”

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