Today the CFTC announced that it filed a complaint in the Southern District of Florida against Sean Michael and his company Mosaic Exchange Ltd.  The complaint alleges that the Defendants solicited and successfully convinced investors to send their bitcoin and other funds to Mosaic under the guise that Mosaic would enter into futures, swaps, and leveraged spot transactions in cryptocurrency on behalf of the investors.  The entire scheme was a sham, a virtual house of cards.  According to the complaint, Defendants falsely represented their experience, track record, and profitability trading digital asset derivatives, falsely claimed that Mosaic was a digital asset trading platform, and falsely touted their use of a proprietary trading algorithm.  Based on these (mis)representations, customers entrusted the Defendants with hundreds of thousands of dollars.  All too quickly, these unsuspecting investors discovered that their hard-earned wealth had evaporated alongside their trust in Defendants’ representations.

As I have said many times, including earlier this month,[1] digital asset fraud places vulnerable investors at risk.  This February, the blockchain analysis firm Chainalysis released a report describing the diversity of criminal activities occurring in dark corners of the crypto-economy.[2]  The report’s analysis demonstrated that “scams remain the largest form of cryptocurrency-based crime” with over $5.9 billion in losses due to fraud last year.[3]  According to Chainalysis, “[a]ll ten of 2022’s top scams were investment scams . . . in which fraudsters promote a fake investment company promising outsized returns.”[4]  I will continue to strongly advise investors to review the CFTC’s advisory page,[5] and to stay vigilant and alert to potential fraud; investors should question anyone offering unusually high or riskless returns. If it sounds too good to be true, it may, in fact, not be true.

This matter also exemplifies just several risks that I raised alarms about and invited greater coordinated enforcement to prevent.  Historically, United States financial regulators accomplish their goals of customer protection and market integrity by focusing on regulatory requirements at the point of intermediation.[6]  In the CFTC’s case, for example, our agency regulates futures commission merchants (FCM), swap dealers (SD), and commodity pool operators (CPO), among other intermediaries, in order to introduce safeguards such as risk management, capital requirements, custody and bankruptcy protections for customer funds, and anti-money laundering and know-your-customer programs.

The CFTC’s Division of Enforcement has brought multiple cases this year charging digital assets financial services companies with operating as unregistered FCMs,[7] CPOs,[8] and swap execution facilities (SEF) or designated contract markets (DCM).[9] But it is imperative that we introduce regulation that closes any potential gaps in derivatives market oversight.

Mosaic was able to trade digital asset derivatives on BitMEX and Binance, two platforms that the CFTC has previously charged with, among other things, failing to register as an FCM, SEF, or DCM, and failing to implement anti-money laundering and know-your-customer procedures.[10]  In accordance with our existing authority, the CFTC should begin introducing regulation to address gaps that may exist in these novel market structures.

Finally, I want to commend the Division of Enforcement staff who vigorously investigated and brought this matter, including Kara Mucha, Steven Kim, Kathleen Banar, and Rick Glaser.