Jag DeSaint: U.S. Regulators Demand Trading Data From Bitcoin Exchanges in Manipulation Probe

Jag Desaint

WASHINGTON — Government investigators have demanded that several bitcoin exchanges hand over comprehensive trading data to assist a probe into whether manipulation is distorting prices in markets linked to the cryptocurrency, according to people familiar with the matter.

The investigation followed the launch of bitcoin futures on CME Group Inc.’s exchange six months ago. CME’s bitcoin futures derive their final value from prices at four bitcoin exchanges: Bitstamp, Coinbase, itBit and Kraken. Manipulative trading in those markets could skew the price of bitcoin futures that the government directly regulates.

CME, which launched bitcoin futures in December, asked the four exchanges to share reams of trading data after its first contract settled in January, people familiar with the matter said. But several of the exchanges declined to comply, arguing the request was intrusive, the people said. The exchanges ultimately provided some data, but only after CME limited its request to a few hours of activity, instead of a full day, and restricted to a few market participants, the people added.

The dispute frustrated CME’s regulator, the Commodity Futures Trading Commission, these people said. In response, the commission subpoenaed the exchanges for the data. CFTC officials backed the launch of bitcoin futures, saying they viewed it as a risky but worthwhile project.

The CFTC was upset CME didn’t have in place agreements that would compel bitcoin markets to share trading data tied to futures contracts, these people said. Such agreements would detail what information the cryptocurrency venues would have to provide to CME, including the time of trades, unfilled or canceled orders, the size of orders, and traders’ identities.

CME initially sought the data through a third-party firm that calculates the bitcoin index price it uses for its futures contract, a person familiar with the matter said.

The bitcoin exchanges were opposed to handing over so much sensitive trading data to the London company, which also operates a platform for trading cryptocurrencies, the people said.

The fight over access to bitcoin trading data was a factor in the CFTC opening an investigation into whether traders have colluded to manipulate bitcoin prices, people familiar with the matter said. The CFTC is coordinating with the U.S. Justice Department, which is separately looking into potential manipulation of other cryptocurrencies, the people added.

The investigation, in its early stages, shows how Washington is pressing virtual-currency exchanges that have r esisted comprehensive government oversight.

Futures allow traders to bet on the direction of the price of assets such as oil, gold or bitcoin. CME offers an array of bitcoin futures for a number of months into the future. The final price of each contract is set on the last Friday of its month, based on the average of the price of bitcoin at the four exchanges during an hour-long window.

CME and the CFTC are supposed to monitor trading during that hour to ensure that individual trades don’t skew the price of the futures. A CME spokeswoman said that its index provider has an information-sharing agreement with each bitcoin exchange.

“All participating exchanges are required to share information, including cooperation with inquiries and investigations,” CME spokeswoman Laurie Bischel said.

A spokesman for Bitstamp declined to comment. A spokeswoman for Coinbase didn’t respond to a request seeking comment.

Kraken Chief Executive Jesse Powell said in a statement Friday the CFTC’s “newly declared oversight” of bitcoin prices that drive futures “has the spot exchanges questioning the value and cost of their index participation.”

Mr. Powell said in an interview earlier this week that worries about bitcoin market manipulation were exaggerated.

“If there is any kind of attempted manipulation, whoever is doing it is taking a huge amount of risk for very little possible upside,” he said.

Investigators are looking for trading schemes that can be used to manipulate the price at which a cryptocurrency trades, the people said. In one example, akin to a practice known as spoofing, a trader enters large orders with the intention of tricking others into thinking there had been a fundamental change in the supply and demand of bitcoin. That might induce others to raise their prices to buy, which can allow the spoofer to sell at an artificially high price.

The CFTC has said bitcoin is a commodity and believes that designation gives it authority to look for fraudulent trading on exchanges, even if the venues aren’t subject to the panoply of rules that futures markets face.

The CFTC in May issued a warning spelling out expectations for approval of new cryptocurrency derivatives. The CFTC said “a heightened level of monitoring” of the bitcoin market is “warranted” for exchanges that want to launch new futures products.

“We have definitely entered an unknown area where it is clear there is a desire for tightened oversight,” said Paxos Chief Executive Charles Cascarilla, whose firm operates itBit. The company declined to comment further.