UNITED STATES OF AMERICA
 

Before the
 

COMMODITY FUTURES TRADING COMMISSION
 

) 

In the Matter of: ) 

) 

Coinflip, Inc., d/b/a Derivabit, and ) 

Francisco Riordan, ) CFTC Docket No. 15-29 

) 

Respondents. ) 

) 

) 

ORDER INSTITUTING PROCEEDINGS PURSUANT TO
 

SECTIONS 6(c) AND 6(d) OF THE COMMODITY EXCHANGE ACT, MAKING
 

FINDINGS AND IMPOSING REMEDIAL SANCTIONS
 

I. 

The Commodity Futures Trading Commission (“Commission”) has reason to believe that 

from in or about March 2014 to at least August 2014 (the “Relevant Period”), Coinflip, Inc., 

d/b/a Derivabit (“Coinflip”) and Francisco Riordan (“Riordan”) (the “Respondents”) violated 

Sections 4c(b) and 5h(a)(1) of the Commodity Exchange Act, as amended (the “Act”), 7 U.S.C. 

§§ 6c(b) and 7b-3(a)(1) (2012), and Commission Regulations 32.2 and 37.3(a)(1), 17 C.F.R. § 

32.2 and 37.3(a)(1) (2014). Therefore, the Commission deems it appropriate and in the public 

interest that public administrative proceedings be, and hereby are, instituted to determine 

whether the Respondents engaged in the violations set forth herein and to determine whether any 

order should be issued imposing remedial sanctions. 

II. 

In anticipation of the institution of an administrative proceeding, the Respondents have 

submitted an Offer of Settlement (“Offer”), which the Commission has determined to accept. 

Without admitting or denying any of the findings or conclusions herein, Respondents consent to 

the entry of this Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the 

Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions (“Order”) and 

acknowledge service of this Order.1 

1 Respondents consent to the entry of this Order and to the use of these findings in this proceeding and in any other 

proceeding brought by the Commission or to which the Commission is a party; provided, however, that Respondents 

do not consent to the use of the Offer, or the findings or conclusions in the Order consented to in the Offer, as the 

sole basis for any other proceeding brought by the Commission, other than in a proceeding in bankruptcy or to 

enforce the terms of this Order. Nor do Respondents consent to the use of the Offer or the Order, or the findings or 

conclusions in this Order consented to in the Offer, by any other party in any other proceeding. 
III. 

The Commission finds the following: 

A. Summary 

During the Relevant Period, Respondents violated Sections 4c(b) and 5h(a)(l) of the Act 

and Commission Regulations 32.2 and 37.3(a)(l) by conducting activity related to commodity 

options contrary to Commission Regulations and by operating a facility for the trading or 

processing of swaps without being registered as a swap execution facility or designated contract 

market. Specifically, during the Relevant Period, Respondents operated an online facility named 

Derivabit, offering to connect buyers and sellers of Bitcoin option contracts. 2 

B. Respondents 

Coinflip, Inc. is a Delaware corporation with a principal place of business in San 

Francisco, California. During the Relevant period, Coinflip operated Derivabit and its website 

derivabit.com. Coinflip has never been registered with the Commission. 

Francisco Riordan is an individual residing in San Francisco, California. Riordan is a 

founder, the chief executive officer, and controlling person of Coinflip. Riordan has never been 

registered with the Commission. 

C. Facts 

Coinflip Conducted Activity Related to Illegal Commodity Options 

Beginning in March 2014, Coinflip adve1iised Derivabit as a "risk management platform 

... that connects buyers and sellers of standardized Bitcoin options and futures contracts." 

During this period, Coinflip designated numerous put and call options contracts as eligible for 

trading on the Derivabit platform. 3 For these contracts, Coinflip listed Bitcoin as the asset 

underlying the option and denominated the strike and delivery prices in US Dollars. According 

to the derivabit.com website, a customer could place orders by registering as a user and 

depositing Bitcoin into an account in the user's name. Premiums and payments of settlement of 

the option contracts were to be paid using Bitcoin at a spot rate determined by a designated thirdpmiy Bitcoin currency exchange. Users had the ability to, and in fact did, post bids or offers for 

2 Bitcoin is a "virtual cutTency," defined here as a digital representation of value that functions as a medium of 

exchange, a unit of account, and/or a store ofvalue, but does not have legal tender status in any jurisdiction. Bitcoin 

and other virtual currencies are distinct from "real" currencies, which are the coin and paper money of the United 

States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a 

medium of exchange in the country of issuance. 

3 Although referenced it its solicitation materials, Coinflip did not offer any futures contracts during the Relevant 

Period. 

2 

the designated options contracts. Coinflip confirmed the bid or offer by communicating it to all 

users through its website. 4 

During the Relevant Period, Derivabit had approximately 400 users. 

Riordan Controlled Coinflip and Directed Its Operations 

Riordan was the founder, engineer and Chief Executive Officer of Coinflip. He exercised 

control over Coinflip's daily operations and possessed the power or ability to control all aspects 

ofthe Derivabit platform. Riordan participated in key aspects of Coinflip's illegal activity, 

including designing and implementing the Derivabit trading platform. Riordan's control enabled 

him to make design and substantive changes to Coinflip's operations, including the transition 

from offering Bitcoin options to OTC Bitcoin Forward Contracts. Ultimately, Riordan possessed 

the power and ability to direct Coinflip to cease operating the Derivabit platform. 

LEGAL DISCUSSION 

A. Virtual Currencies Such as Bitcoin are Commodities 

Section 1a(9) of the Act defines "commodity" to include, among other things, "all 

services, rights, and interests in which contracts for future delivery are presently or in the future 

dealt in." 7 U.S.C. § 1a(9). The definition of a "commodity" is broad. See, e.g., Board ofTrade 

ofCity ofChicago v. SEC, 677 F. 2d 1137, 1142 (7th Cir. 1982). Bitcoin and other virtual 

currencies are encompassed in the definition and properly defined as commodities. 

B. Coinflip Violated Sections 4c(b) Act and Commission Regulation 32.2 

Section 4c(b) ofthe Act makes it unlawful for any person to "offer to enter into, enter 

into or confirm the execution of, any transaction involving any commodity ... which is of the 

character of, or is commonly known to the trade as, an 'option' ... , 'bid', 'offer', 'put', [or] 

'call' ... contrary to any rule, regulation, or order of the Commission prohibiting any such 

transaction." Section 1.3(hh) defines a "commodity option transaction" and "commodity option" 

to "mean any transaction or agreement in interstate commerce which is or is held out to be of the 

character of, or is commonly known to the trade as, an 'option,' 'privilege,' 'indemnity,' 'bid,' 

'offer,' 'call,' 'put,' 'advance guaranty,' or 'decline guaranty,' and which is subject to regulation 

under the Act and these regulations." Section 32.2 of the Commission's Regulations, in turn, 

4 In July 2014, Coinflip began to offer what it characterized as "OTC Bitcoin Forward Contracts" for trading. Under 

this model, a Derivabit user would be matched through competitive bidding with a counterparty to execute a 

contract to exchange US Dollars for Bitcoins at a predetermined price and date. As part of its services, Coinflip 

would calculate and hold initial and maintenance margin payments and would also calculate and facilitate the 

transfer of final settlements at maturity or early termination. Coin flip advettised that the users could choose to 

institute an early termination at any time if its position was "in the money." Although the price would be expressed 

as an exchange rate between US Dollars and Bitcoins, Coinflip required all settlements and margin payments to be 

transacted in Bitcoins. No bids or offers were posted by Derivabit users for these contracts. Although these 

activities may have violated, or led to violations of, the Commodity Exchange Act, the Commission does not 

address this conduct here. 

3 

provides that it shall be unlawful for any person to "offer to enter into, enter into, confirm the 

execution of, maintain a position in, or otherwise conduct activity related to any transaction in 

interstate commerce that is a commodity option transaction unless: (a) [s]uch transaction is 

conducted in compliance with and subject to the provisions of the Act, including any 

Commission rule, regulation, or order thereunder, otherwise applicable to any other swap, or (b) 

[s]uch transaction is conducted pursuant to [Regulation] 32.3." 

Between at least March 2014 and July 2014, Respondents conducted activity related to 

commodity option transactions, offered to enter into commodity option transactions and/or 

confirmed the existence of commodity option transactions. The options transactions were not 

conducted in compliance with Section 5h(a)(1) of the Act or Regulation 37.3(a)(l), a section of 

the Act and a Commission regulation otherwise applicable to swaps (see infra Section C) and 

were not conducted pursuant to Regulation 32.3. 5 Accordingly, Coinflip violated Section 4c(b) 

of the Act and Commission Regulation 32.2. 

C. 	 Coinflip Violated Section Sh(a)(l) of the Act 

Section 5h(a)(1) ofthe Act forbids any person from operating "a facility for the trading or 

processing of swaps unless the facility is registered as a swap execution facility or as a 

designated contract market ...." 7 U.s.c.' § 7b-3(a)(1). Section 1a(47) of the Act's definition 

of"swap" includes option contracts. 7 U.S.C. § 1a(47)(A)(i). Regulation 37.3(a)(1) similarly 

requires that any "person operating a facility that offers a trading system or platform in which 

more than one market participant has the ability to execute or trade swaps with more than one 

other market participant on the system or platform shall register the facility as a swap execution 

facility under this part or as a designated contract market under part 38 of this chapter." 17 

C.P.R. § 37.3(a)(l) (2014). 

During the Relevant Period, Coinflip operated a facility for the trading of swaps. 

However, Coinflip did not register the facility as a swap execution facility or designated contract 

market. Accordingly, Coinflip violated Section 5h(a)(l) ofthe Act and Regulation 37.3(a)(1). 

D. 	 Riordan Is Liable for Coinflip's Violations as Its Controlling Person Under Section 

13(b) of the Act 

Riordan controlled Coinflip, directly or indirectly, and did not act in good faith or 

knowingly induced, directly or indirectly, Coinflip's acts in violation of the Act and Regulations; 

therefore, pursuant to Section 13(b) of the Act, 7 U.S.C. § 13c(b) (2012), Riordan is liable for 

Coinflip's violations of Sections 4c(b) and 5h(a)(1) ofthe Act, 7 U.S.C. §§ 6c(b) and 7b-3(a)(l) 

(2012) and Regulations 32.2 and 37.3(a)(1), 17 C.P.R.§§ 32.2 and 37.3(a)(1) (2014). 

5 To take advantage of the "trade option" exemptions set forth in Regulation 32.3, the offeror of the option must be 

an eligible contract participant as defined in Section 1 a( 18) of the Act or "producer, processor, or commercial user 

of, or a merchant handling the commodity," and have a reasonable basis to believe that the offeree was a "producer, 

processor, or commercial user of, or a merchant handling the commodity that is the subject of the commodity option 

transaction, or the products or by-products thereof, and such offeree is offered or entering into the commodity option 

transaction solely for purposes related to its business as such." 17 C.F.R. §§ 32.3(a)(1)(i)-(ii) and 32.3(a)(2). 

4 

IV. 

FINDINGS OF VIOLATIONS 

Based on the foregoing, the Commission finds that, during the Relevant Period, 

Respondents violated Sections 4c(b) and 5h(a)(1) ofthe Act, 7 U.S.C. §§ 4c(b) and 7b-3(a)(l) 

(2012), and Commission Regulations 32.2 and 37.3(a)(l), 17 C.P.R. §§ 32.2 and 37.3(a)(1) 

(2014). 

v. 

OFFER OF SETTLEMENT 

Respondents have submitted an Offer in which they, without admitting or denying the 

findings and conclusions herein: 

A. 	 Acknowledge receipt of service of this Order; 

B. 	 Admit the jurisdiction ofthe Commission with respect to all matters set forth in this 

Order and for any action or proceeding brought or authorized by the Commission based 

on violation of or enforcement of this Order; 

C. 	 Waive: 

1. 	 the filing and service of a complaint and notice of hearing; 

2. 	 a hearing; 

3. 	 all post-hearing procedures; 

4. 	 judicial review by any court; 

5. 	 any and all objections to the participation by any member of the Commission's 

staff in the Commission's consideration ofthe Offer; 

6. 	 any and all claims that they may possess under the Equal Access to Justice Act, 5 

U.S.C. § 504 (2012) and 28 U.S.C. § 2412 (2012), and/or the rules promulgated by 

the Commission in conformity therewith, Part 148 of the Commission's 

Regulations, 17 C.P.R.§§ 148.1-30 (2014), relating to, or arising from, this 

proceeding; 

7. 	 any and all claims that they may possess under the Small Business Regulatory 

Enforcement Fairness Act of 1996, Pub. L. No. 104-121, §§ 201-253, 110 Stat. 

847, 857-868 (1996), as amended by Pub. L. No. 110-28, § 8302, 121 Stat. 112, 

204-205 (2007), relating to, or arising from, this proceeding; and 

5 
8. 	 any claims of Double Jeopardy based on the institution of this proceeding or the 

entry in this proceeding of any order imposing a civil monetary penalty or any 

other relief; 

D. 	 Stipulate that the record basis on which this Order is entered shall consist solely ofthe 

findings contained in this Order to which Respondents have consented in the Offer; 

E. 	 Consent, solely on the basis of the Offer, to the Commission's entry of this Order that: 

1. 	 makes findings by the Commission that Respondents violated Sections 4c(b) and 

5h(a)(1) ofthe Act, 7 U.S.C. §§ 6c(b) and 7b-3(a)(1) (2012), and Commission 

Regulations 32.2 and 37.3(a)(l), 17 C.P.R. §§ 32.2 and 37.3(a)(l) (2014); 

2. 	 orders Respondents to cease and desist from violating Sections 4c(b) and 5h(a)(l) 

of the Act and Commission Regulations 32.2 and 37.3(a)(1); and 

3. 	 orders Respondents and their successors and assigns to comply with the 

conditions and undertakings consented to in the Offer and as set fmih in Pmi VI 

of this Order. 

Upon consideration, the Commission has determined to accept Respondents' Offer. 

VI. 

ORDER 

Accordingly, IT IS HEREBY ORDERED THAT: 

A. 	 Respondents shall cease and desist from violating Sections 4c(b) and 5h(a)(1) of the Act, 

7 U.S.C. §§ 6c(b) and 7b-3(a)(l) (2012), and Commission Regulations 32.2 and 

37.3(a)(1), 17 C.P.R. §§ 32.2 and 37.3(a)(1) (2014). 

B. 	 Respondents and their successors and assigns shall comply with the following conditions 

and undertakings set forth in the Offer: 

1. 	 Public Statements: Respondents agree that neither they nor any of their 

successors and assigns, agents, or employees under their authority or control shall 

take any action or make any public statement denying, directly or indirectly, any 

findings or conclusions in the Order or creating, or tending to create, the 

impression that the Order is without a factual basis; provided, however, that 

nothing in this provision shall affect Respondents' (i) testimonial obligations; or 

(ii) right to take legal positions in other proceedings to which the Commission is 

not a party. Respondents and their successors and assigns shall undetiake all 

steps necessary to ensure that all of their agents and/or employees under their 

authority or control understand and comply with this agreement. 

2. 	 Cooperation with the Commission: Respondents shall cooperate fully and 

expeditiously with the Commission, including the Commission's Division of 

6 

Enforcement, and any other governmental agency in this action, and in any 

investigation, civil litigation, or administrative matter related to the subject matter 

of this action or any current or future Commission investigation related thereto. 

The provisions of this Order shall be effective as of this date. 

By the Commission. 

Christopher J. Grkpatrick 

Secretary of the Commission 

Commodity Futures Trading Commission 

Dated: September 17, 2015 

7