Add the chairman of the largest electronic brokerage firm in the U.S. to the list of Cassandras warning us of the perils posed by the trading of cryptocurrencies.

In a remarkable open letter in The Wall Street Journal addressed to J. Christopher Giancarlo, the Chairman of the Commodity Futures Trading Commission, Thomas Peterffy, Chairman of Interactive Brokers, reacted adversely to a proposal by the Chicago Mercantile Exchange to allow Bitcoin and other cryptocurrency derivatives to be cleared in the same clearing organization as other products. The reason? According to Peterffy:

Cryptocurrencies do not have a mature, regulated and tested market. The products and their markets have existed for fewer than 10 years and bear little if any relationship to any economic circumstance or reality in the real world.1

The risk is so great that “a catastrophe in the cryptocurrency market that destabilizes a clearing organization will destabilize the real economy.” Peterffy’s solution is for the CFTC to require that any clearing organization that wishes to clear cryptocurrencies or their derivatives do so in a wholly separate clearing system which is isolated from the systems for other products.

While the potential for catastrophe may be a bit exaggerated, the solution shouldn’t be easily dismissed. It’s not as if the CFTC has ignored problems projected by trading in cryptocurrencies. Actually, the agency has for years been trying strike a balance between making the public aware of the dangers they pose and not seeming too heavy handed in doing so.

The CFTC’s reach is quite broad. The agency’s regulatory powers extend to exchange actions and the review and approval of futures contracts, and it has the power to issue any rule it finds necessary to accomplish the mission of the Commodity Exchange Act, to foster open, transparent and financially sound markets.2 Before it approves a contract for trading, the CFTC must determine that it is in the public interest by assessing whether its use for price discovery and hedging serve a genuine economic purpose.3 The CFTC also uses its power to prevent fraud and market manipulation to assert jurisdiction over commodity trading in spot markets.

The CFTC took the occasion of a settlement with an unregistered swap execution facility to declare that Bitcoin and other virtual currencies are commodities and subject to regulation as such.4 Only recently, the CFTC circulated a “Primer” on virtual currencies to educate the industry and investing public on their nature and, perhaps most importantly, the risks they pose.5

To date, market commentators, like the CFTC, have focused on a number of valid concerns about cryptocurrencies: They’re a bubble. They pose security risks. They’re a ready vehicle for fraud and money laundering. Peterffy’s point is different: That cryptocurrencies will, in the end, damage clearing and trading firms that deal in the currencies, and even those that don’t, and the exchanges.

It’s a point well taken. Consider this. Futures margin rates range from 2 to 8%. The more aggressive trading firms set their rates at the lower end of the range to attract business. When losses exceed the amount margined, the broker must cover them first and then try to collect from the client.

This year, the price of Bitcoin has been up by as much as 1000%, that of Ethereum over 2000%. Those prices might rise. But no one should be surprised if they collapse by 50% or more. Unlike, say, an agricultural commodity or an equity index, cryptocurrencies have no real economic function, and there is often no apparent or fundamental reason for their price movements.

That’s why, according to Peterffy, trading and clearing firms, especially those which don’t have much money to lose, will collapse along with the price of cryptocurrencies. And take firms which don’t even trade in the currencies with them, and maybe the exchanges as well.

That’s where the CFTC comes in. So far, its attempts at gentle persuasion don’t appear to have been terribly effective. The CFTC has far more authority than it has used. Maybe it’s time for the CFTC to set aside its reluctance to put a thumb on the scale and recognize that it’s in the public interest to be proactive and adopt Peterffy’s suggestion or even place limitations on liability for cryptocurrency futures. Will that happen? Place your bets.


1 “Dangers of Clearing Bitcoin and Cryptocurrency Derivatives in Same Clearing Organization as Other Products,” The Wall Street Journal, Nov. 15, 2017, p. B5

2 7 U.S.C. § 12(a)(5)

3 7 U.S.C. § 19 (a)(2)

4 In the Matter of Coinflip, Inc. d/b/a Derivabit and Francisco Riordan, CFTC Docket No. 15-29 (Sept. 17, 2015)

5 A CFTC Primer on Virtual Currencies (Oct. 17, 2017)

October 2017 - Crow & Cushing Featured in CTA Intelligence [October 2017]

CTA Intelligence (CTA): What factors informed your decision to form the partnership which became Crow and Cushing?

Charles Crow (CC): In 1981 I left a large firm, came down to Princeton and was introduced to a company called Commodities Corporation – the first company to bring a scientific methodology and discipline to the spec side of trading. I became one of their outside counsel. At that time, the first version of limits came in, which resulted in Commodities Corporation’s having to spin off their most successful traders.

As we were an outside counsel that had demonstrated some ability in commodities and securities, we were general counsel to the subsidiary of Commodities Corporation that traded securities. In some instances, we had an opportunity to pick up these traders as clients when they were ‘spun off’ from Commodities Corporation. David joined the law firm in 1999, Mark in 2008 and Francis [Tanczos] in 2011. We enjoyed practising and dealing with these clients, so that in a nutshell is how we got started.

CTA: How do you compete with larger firms?

David Cushing (DC): Most of our competitors are part of groups in large national firms in financial centres. So we have to differentiate ourselves. We like to think we do it by providing a cost-effective option where clients can get senior level expertise and deep knowledge of their industry in all areas of our practice.

Mark Schorr (MS): I’ve practised in large and medium-sized firms and have observed that clients usually hire lawyers, not firms. Because we have such a collegial dynamic here, because we collaborate so well, we can allocate work so that it gets done efficiently. Here, you truly hire not just a lawyer, but a law firm as well.

CC: One of our most important features is that we make an effort to understand people’s business. We refer out litigation, and the reason for this is simple: we like to maintain strong relationships with our clients. We don’t view our clients as having a half-life, and by understanding a client’s business well, we can give them better advice and keep them as clients.

CTA: What is the function of your employee counselling services?

MS: I’ve been practising employment law for close to 40 years and these things are second nature. I used to litigate employment cases and learned pretty early on that litigation is usually the worst option. So our job is to deal with employment issues to keep you out of the courtroom.

DC: These services could revolve around particular and specialised personnel issues, such as someone leaving a fi rm. Very often, hedge fund managers have detailed employment contracts, strict non-disclosure agreements and in many cases non-competition provisions – especially for technical or quantitative-based trading. We help the managers we represent in reaching solutions tailored to their individual needs and their own employees.

CTA: You have been named Best Law Firm-Client Services by CTA Intelligence for two years running – what has informed this success?

CC: The real proof of what we do here is not the awards, which are certainly gratifying, but the client relationships we have established and sustained. Our goal has always been to build long-term relationships. We believe that if we serve clients well and treat them as partners, they’ll reward us with more work. So the chief marker of our success is the relationships we’ve developed, spanning many years and sometimes decades.

DC: We have also developed long-term relationships with service providers to the industry, such as fund administrators. We not only find these relationships rewarding, but they allow us to understand the industry from different perspectives, which we think makes us better lawyers.

CC: I think it helps too that we refer litigation out. Typically, even if you get a good result in a courtroom, the cost to the client is so high that it’s hard to come out of that and have a client think the same way about you as they did at the start.

We’re not a general practice firm, but we maintain a referral network, so that when clients have litigation, intellectual property or immigration issues, we always have what we believe to be appropriate counsel in mind.

That may not be the best economic model for a law firm. I can tell you it is not, but we value relationships a lot more than opportunities. We like to think that the foundation of our business is trust.

DC: On occasion, we are consulted, for example, about a product where we don’t have the deep experience clients have come to expect. We’d probably pass on that. We don’t hesitate to tell a client we’re not best suited to a particular project. I think our clients appreciate that.

But while we certainly specialise in commodities and futures regulation, that’s not all we do. We have expertise in securities and just about any area that touches asset management. We like to think we’re a full-service firm when it comes to the asset management industry, which allows us to compete with the larger national firms that practice in this area.

CTA: Given that you offer such a broad range of services, how do you prioritise?

CC: It actually works out pretty well. We grew up with the industry. When we started doing work with commodities, it was a very disciplined approach but regulation was not what it is today. Therefore as regulatory changes evolved, it was relatively easy for us to grow and adapt alongside them.

But we’re not going to do anything that would compromise our ability to service our clients fully. So if we have a priority, it’s to focus on our core competencies and grow into new areas incrementally once we have confidence in our ability there.

CTA: Where do you see Crow & Cushing heading in the future – what’s next for your firm?

DC: We want to keep growing with the industry. We continue to learn and stay current with emerging technologies and regulatory developments, so that we can maintain a high level of service.

CC: Most of all, we want to solidify our client relationships, develop new ones, and continue to practice together. Because that’s the reason we got into this business in the first place.


Charles Crow has represented institutions and individuals in the alternative investment industry since 1981. Clients include firms and individuals residing and working in the United States, Asia, Europe and Africa.

David Cushing has over 20 years of experience as an attorney in the financial services industry. He focuses on counselling clients in respect of the structuring of private investment fund and assisting with regulatory matters in the United States.

Francis Tanczos joined the firm in 2011 and focuses on counselling clients working in the financial services and money management industry.

Mark Schorr counsels clients in the financial services industry on a wide range of matters, including regulatory and employer-employee relations.

The full article is available to download here.

September 2017 - THE SEC AND THE ICO

Some people are making real money investing in cryptocurrencies. Just this year, Bitcoin has gained 300%. Another cryptocurrency, Ethereum, is up more than 2,300%.

An increasingly common use of these currencies is the initial coin offering, or ICO. Companies are using ICOs to raise funds by offering investors the chance to buy into a new venture using a cryptocurrency in exchange for virtual tokens instead of stock in the company. The tokens grant investors access to a product or service to be offered by the token issuer. Sound confusing? Here’s how Kevin Roose illustrated the process in a column in the New York Times:

Imagine that a friend is building a casino and asks you to invest. In exchange, you get chips that can be used at the casino’s tables once it’s finished. Now imagine that the value of the chips isn’t fixed, and will instead fluctuate depending on the popularity of the casino, the number of other gamblers and the regulatory environment for casinos. Oh, and instead of a friend, imagine it’s a stranger on the internet who might be using a fake name, who might not actually know how to build a casino, and whom you probably can’t sue for fraud if he steals your money and uses it to buy a Porsche instead. That’s an ICO.1

In recognition of the likelihood of abuse, China’s Central Bank, the People’s Bank of China, has recently put an end to ICOs there, claiming they are rife with fraud, pyramid schemes and other criminal activity. Chinese ICOs scheduled to launch this month have been put on hold.

The SEC, perhaps because it lacks the sweeping powers of China’s Central Bank, has taken a more measured approach in warning potential ICO sponsors and online platforms that support trading of tokens that they might be subject to US securities laws, which they have pretty much ignored to date. The SEC picked on one particular ICO, which called itself The DAO, which stands for Decentralized Autonomous Organization, a term used to describe a “virtual” organization embodied in computer code and executed on a distributed ledger or block chain.

The concept of a DAO entity is memorialized in the document known as a “White Paper.” This one would use “smart contracts” to solve governance issues it described as inherent in traditional corporations. The DAO’s website explained its intended purpose this way: “To blaze a new path in business for the betterment of its members, existing simultaneously nowhere and everywhere and operating solely with the steadfast iron will of unstoppable code.” (Seriously?)

The token issue sold out. However, before The DAO could commence funding projects, an attacker exploited a flaw in its code to steal approximately one-third of The DAO’s assets.

The DAO was able to get investors their money back, but an unwelcome consequence was that the contretemps got the attention of the SEC, which saw a larger issue: Whether the tokens were securities under the Securities Act of 19332 and the Securities Exchange Act of 19343, necessitating registration with the SEC of both the tokens and the exchanges on which they are traded (unless they qualified for an exemption from the registration requirements). You get the feeling that the SEC knew the answer before it undertook what it described as an “investigation.”4

Under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, the definition of security encompasses an “investment contract.”5 An investment contract is an investment of money in a common venture premised on a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. The definition is “flexible,” so that it can be adapted to a fit “countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”6 So, to the SEC, the scope of the term investment contract is broad enough to include an offer which involves a decentralized autonomous organization, a cryptocurrency or a block chain-enabled means for raising capital, or a scheme involving all three at once.

The only serious question for the SEC was whether rights of token holders to vote on projects the coin issuer would undertake made them more than passive participants in the enterprise. The short answer was that limited voting rights and the wide distribution of the tokens rendered the owners’ contribution to the management of The DAO insignificant.

The SEC cautioned that its conclusion did not necessarily apply to all ICOs, and each case had to be judged on its own facts. But it’s hard to imagine circumstances in which an ICO wouldn’t involve a security, given the broad reach of that term, except in the unlikely event that the issuer of tokens were willing to cede management control to the buyers.

The SEC declined to pursue an enforcement action against The DAO, probably thinking it was pointless. The flaw in its code likely doomed the whole enterprise anyway.

What the SEC more likely intended was to send a message to the sponsors of ICOs (and the platforms that support secondary trading in the tokens), and anyone thinking of becoming a sponsor, that there is more to soliciting investments for profit in a common venture than just circulating a “White Paper” online.

The SEC’s other aim in all of this is surely to afford potential investors in ICOs the procedural protections and the disclosure of material information that come with registration. Whether that works either to reduce the possibility of ICO scams or to cool the ardor of investors for these schemes remains to be seen.


1 Roose, “Such Currency. Much Risk,” NY Times, September 16, 2017, p.B3.

2 15 U.S.C. §§77a et seq.

3 15 U.S.C. §§78a et seq.

4 Report of Investigation Pursuant to §21(a) of the Securities Exchange Act of 1934: The DAO, Release No. 81207, (July 25, 2017). The facts in the text are those related in the SEC’s report.

5 15 U.S.C. §§77b(1).

6 SEC v. W.J. Howey Co., 321 U.S. 293, 299 (1946).