CFTC Files Its First Fraud Charges Against Alleged Gelfman Bitcoin Scheme
On September 21, 2017, the Commodity Futures Trading Commission (CFTC) announced that it has filed a federal civil enforcement action in the US District Court for the Southern District of New York against Nicholas Gelfman and Gelfman Blueprint Inc. (GBI). The CFTC alleges that between approximately January 2014 and January 2016, Gelfman and the New York corporation fraudulently solicited more than $600,000 from roughly 80 investors. The money was directed toward a pooled bitcoin investment fund that “purportedly employed a high-frequency, algorithmic trading strategy,” the CFTC explained in its release.
According to CoinMarketCap, the price of bitcoin fell from $864.89 on January 5, 2014, to $431.45 on January 3, 2016. Across this two-year stretch, the price dipped as low as the 200s, before posting a marginal recovery. The downturn in the bitcoin market likely put additional pressure on Gelfman and GBI. However, it’s unclear whether their bitcoin trading strategy was dishonest from the outset.
The CFTC complaint asserts that Gelfman and GBI’s trading program – “Jigsaw” – was bogus. Records from the Jigsaw trading account demonstrate “infrequent and unprofitable trading,” the agency alleges, and payouts of profit were comprised of misappropriated funds that really belonged to other investors. To hide the losses and unlawful activity, Gelfman and GBI circulated false performance reports and even fabricated a “hack” to cover up his scheme, said the CFTC. The agency labeled its announcement as its “first anti-fraud enforcement action involving bitcoin.”
In a statement, CFTC director of enforcement James McDonald said, “Through its work across the Commission, and as exemplified by the work of LabCFTC, the CFTC has demonstrated its continued commitment to facilitating market-enhancing FinTech innovation.”
“Part of that commitment includes acting aggressively and assertively to root out fraud and bad actors in these areas,” McDonald continued. “As alleged, the Defendants here preyed on customers interested in virtual currency, promising them the opportunity to invest in bitcoin when in reality they only bought into the Defendants’ Ponzi scheme. We will continue to work hard to identify and remove bad actors from these markets.”
CFTC chairman J. Christopher Giancarlo recently praised the regulatory potential of blockchain technology, the digital framework that underlies bitcoin and many other cryptocurrencies. In July 2017, the CFTC granted registration to cryptocurrency futures platform LedgerX as a derivatives clearing organization and swap execution facility. The agency is also responsible for a regulatory review of cash-settled bitcoin futures, which pending approval, will be offered by the Chicago Board Operations Exchange in conjunction with Gemini.