The U.S. District Court for the District of
Massachusetts is the latest court to rule that virtual currencies are
commodities, and subject to Commodity Futures Trading Commission (CFTC)
In CFTC v. My Big Coin Pay, Inc., the district court entered
an order holding that the CFTC has the power to prosecute fraud involving
virtual currency, even in instances where there is no futures contract over the
relevant virtual currency. This decision, along with enforcement actions of
other regulators, have provided some clarity to participants involved in
virtual currency markets.
this article, which originally appeared in Drinker
Biddle's SECurities Law Perspectives blog, I discuss My Big Coin Pay decision, CFTC v. McDonnell and recent enforcement actions
by the SEC, CFTC and FINRA.
definition of ‘commodity’ is broad. Bitcoin and other virtual currencies are
encompassed in the definition and properly defined as commodities.” (In re
Coinflip, Inc., CFTC No. 15-29 (Sept. 17, 2015)). This has been the view of
the Commodity Futures Trading Commission (CFTC) since at least 2015, and the
courts increasingly appear to be affirming the Commission’s assertion of
jurisdiction over the virtual currency market.
U.S. District Court for the District of Massachusetts is the latest court to
rule that virtual currencies are commodities, and subject to CFTC jurisdiction.
(See CFTC v. My Big Coin Pay, Inc, 1:18-CV-10011-RWZ). In My Big Coin,
the district court entered an order holding that the CFTC has the power to
prosecute fraud involving virtual currency, even in instances where there is no
futures contract over the relevant virtual currency.
“commodity” as defined in the Commodities Exchange Act (CEA) includes a list of
enumerated agricultural products, “and all other goods and articles… and 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).
defendants argued that a commodity under this definition required the specific
item at issue be the subject of a futures contract. The only existing futures
are on Bitcoin (CME’s BTC and CBOE’s XBT), no other virtual currency currently
underlies a futures contract. Because contracts for future delivery were not
“dealt in” the virtual currency at issue, My Big Coin (MBC), defendants argued
MBC could not be a commodity under the CEA. The court rejected the defendant’s
argument, holding that the “CEA only requires the existence of futures trading
within a certain class… to be considered commodities.”
holding is consistent with an earlier decision in the Eastern District of New
York, where the court found virtual currencies fell “well-within” the
definition of commodity, and can therefore be regulated by the CFTC. (See CFTC
v. McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018)).
distinguishable from My Big Coin, in that McDonnel involved
alleged fraud in connection with Bitcoin, a virtual currency with an existing
futures market. This distinction was apparently not relevant to the court in My
Big Coin. It ruled that if futures contracts exist within a certain class
of commodities (such as virtual currency), then all items within that
class are considered commodities under the CEA.
is a virtual currency and it is undisputed that there is futures trading in
virtual currencies (specifically involving Bitcoin). That is sufficient…to
allege that [MBC] is a ‘commodity’ under the Act.” (See My Big Coin, 1:18-CV-10011-RWZ).
important to note the court also rejected Defendant’s argument that the CFTC’s
anti-fraud authority under Section 6(c)(1) of the CEA extended only to
fraudulent market manipulation, holding that the “broad language in the
statute” “explicitly prohibit[s] fraud even in the absence of market
6(c) of the CEA, and the ancillary CFTC rule 180.1, prohibit the use of any
manipulative or deceptive device or contrivance in connection with transactions
involving commodities in interstate commerce. 17 C.F.R. §180(a)(1)-(3). The
CFTC has looked to assert this authority not only over instances of fraud in
the cash commodity market that manipulates the derivatives market, but also in
instances of fraud where no market manipulation, or even a relevant futures
finding again was consistent with the McDonnell court, which faced a
similar argument. Not all courts who have decided this issue, however, are in
agreement. In May this year a US District Court for the Central District of
California found that “the CEA unambiguously forecloses the application of
6(c)(1) in the absence of actual or potential market manipulation. (CFTC v
Monex, SACV 17-01868 JVS). This decision is being appealed by the CFTC.
rulings in My Big Coin and McDonnell are particularly broad, and
extend CFTC jurisdiction not only over all virtual currencies, but over all
fraud in such virtual currencies, regardless of any impact or manipulation on a
futures contract. The CFTC, however, is not the only regulator looking to
assert or extend its enforcement rights over virtual currency market
participants. There have been a series of recent enforcement actions announced
by the CFTC, SEC and FINRA.
First, the SEC entered an order finding that Crypto Asset
Management LP (CAM) offered a fund that operated as an unregistered investment
company while falsely marketing it as the “first regulated crypto asset fund in
the United States.” According to the SEC’s order, hedge fund CAM raised more
than $3.6 million over a four-month period in late 2017 while falsely claiming
that it was regulated by the SEC and had filed a registration statement with
the agency. By engaging in an unregistered non-exempt public offering and
investing more than 40 percent of the fund’s assets in digital asset
securities, CAM caused the fund to operate as an unregistered investment
Second, the SEC settled charges against another firm and its
owners for violations of the Securities Exchange Act. Specifically, the
Commission found a platform that brokered both secondary purchases of virtual
currencies and sales of ICOs was improperly operating as an unregistered
broker/dealer. This was the SEC’s first case charging unregistered
broker-dealers for selling digital tokens after the SEC issued The DAO
Report in 2017 cautioning that those who offer and sell digital securities
must comply with the federal securities laws.
the SEC and CFTC filed charges in separate complaints against a virtual currency dealer based in the
Marshall Islands and its Austrian based CEO for various federal regulatory
violations, including: failure to properly register as a security-based swaps
dealer, failure to properly register as a FCM, and failure to properly maintain
adequate anti-money laundering procedures.
FINRA announced charges against an individual for selling virtual
currency that was not properly registered as a security. These charges followed
FINRA’s recent request for member firms to voluntarily disclose their virtual
currency activities (see previous remarks here). FINRA asked firms to not only disclose their activity,
but the outside virtual currency business activities of their associated
recent caselaw and regulatory actions continue the trend towards more
regulatory oversight of the virtual currency market. While the McDonnell andMy Big Coin holdings appear far-reaching, they (along with the
enforcement actions of other regulators) have provided some clarity to the
Author, Nicholas J. Wendland, Drinker
Biddle & Reath LLP