Virtual Currencies Can Be Regulated by CFTC as a “Commodity”
In a notable ruling, a Massachusetts district court declined to dismiss a complaint filed by the Commodity Future Trading Commission (“CFTC”) against an entity over an alleged fraudulent virtual currency offering, ruling that cryptocurrencies fall under the definition of “commodity” under the Commodity Exchange Act (“CEA”) and therefore may be duly regulated by the CFTC. (CFTC v. My Big Coin Pay, Inc., No. 18-10077 (D. Mass. Sept. 26, 2018)). Given that the CFTC has stated its intention to actively police the virtual currency markets, this decision is important in reinforcing the CFTC’s legal authority and jurisdiction over cryptocurrency offerings. Moreover, given that earlier this year a New York district court affirmed the CFTC’s jurisdiction over virtual currencies, this latest ruling is additional precedent in this regulatory area.
In January 2018, the CFTC brought suit against the defendant My Big Coin Pay, Inc. (“My Big Coin”), creator of the My Big Coin virtual currency (“MBC”), alleging that it was engaged in a fraudulent “virtual currency scheme” in violation of the CEA and a CFTC implementing regulation banning fraud or manipulation in connection with the sale of a commodity (17 C.F.R. §180.1(a)). Specifically, the CFTC alleged that the defendants fraudulently solicited customers by making false claims about MBC’s value, usage and trade status, and false statements that the virtual currency was backed by gold. The defendants also told investors that MBC was being “actively traded” on several currency exchanges, but, according to the CFTC, My Big Coin made up and arbitrarily changed the price of the MBC virtual currency to mimic the fluctuations of a legitimate, actively-traded virtual currency. As asserted by the CFTC, the defendants allegedly misappropriated over $6 million from customers for personal gain. The court previously issued a restraining order freezing the defendants’ assets.In its motion to dismiss, the defendants’ principal argument was that the CFTC failed to state a claim because the MBC virtual currency is not a “commodity” within the meaning of the CEA. As noted by the court, the CEA generally grants CFTC exclusive jurisdiction over futures contracts and the exchanges where they are traded. “Commodity” is a defined term in the CEA, and it includes a host of specifically enumerated agricultural products as well as “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.” The defendants contend that because “contracts for future delivery” are indisputably not “dealt in” MBC, it cannot be a commodity under the CEA; defendants also take the position that in order to satisfy the CEA’s “commodity” definition, the specific item in question must itself underlie a futures contract. The CFTC responded that “a ‘commodity’ for purposes of the CEA is broader than any particular type or brand of that commodity.”
Agreeing with the CFTC, the court ruled that the text of the CEA supports the CFTC’s position, as the Act defines “commodity” generally and categorically, “not by type, grade, quality, brand, producer, manufacturer, or form.” The court reasoned that this “broad approach” accords with Congress’s goal of “strengthening the federal regulation of the … commodity futures trading industry.” Thus, the court concluded that MBC is a virtual currency and that it was “undisputed” that there is futures trading in virtual currencies (specifically involving Bitcoin), and as such, the CFTC’s claims that MBC is a “commodity” under the CEA were sufficiently plead at this stage.
Jonathan Mollod contributed to this post.