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Virtual Currency Is a Commodity Regulated by the CFTC, Eastern District of New York Rules

A federal court this week found that the U.S. Commodity Futures Trading Commission (CFTC) had jurisdiction to regulate a cryptocurrency business, raising the possibility of jurisdictional tension among the CFTC and other federal agencies over the regulatory future of the emerging industry.

The CFTC charged Patrick K. McDonnell and CabbageTech, Corp. (d/b/a Coin Drop Markets) in January "with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin" in the Eastern District of New York. On February 15, McDonnell filed a pro se motion to dismiss the charges, arguing that the CFTC did not have jurisdiction to bring this action because virtual currencies are not commodities—or, alternatively, that the CFTC can only regulate virtual currency derivative products.

Since late 2015, in the Coinflip case, the CFTC has officially asserted that "Bitcoin and other virtual currencies are . . . properly defined as commodities." The CFTC reasoned that because virtual currency "is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value," it fits within the broad definition of "commodity" under the Commodities Exchange Act. According to the CFTC's Chairman, J. Christopher Giancarlo, that grants the CFTC the power to not only regulate virtual currency derivative products (like options, swaps, or other leveraged transactions) but also "enforcement jurisdiction" to subpoena, investigate, and bring civil enforcement actions "against fraud and manipulation . . . in underlying virtual currency spot markets just like other commodities." The CFTC was only recently awarded this broad regulatory power under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and it appears that with regard to virtual currency, in CabbageTech and other cases, the CFTC is asserting its belief that this authority extends to virtual currency.

EDNY Judge Jack Weinstein on Tuesday agreed with the CFTC's interpretation of its own power, ruling that virtual currencies are commodities and that the CFTC had jurisdiction to regulate fraud and manipulation in underlying virtual currency spot markets. As part of the opinion, Judge Weinstein accepted—in totality—the CFTC's previous guidance on this subject.

This is the first opinion from a federal court affirming the CFTC's jurisdiction to regulate virtual currency spot and derivative markets. Judge Weinstein's opinion focused on a key issue for virtual currency issuers and exchanges: which federal or state regulatory agency should be in charge of regulating virtual currency? Judge Weinstein's answer: "[t]he jurisdictional authority of CFTC to regulate virtual currencies as commodities does not preclude other agencies from exercising their regulatory power when virtual currencies function differently than derivative commodities." This answer is far from definitive and certainly suggests that depending on how the virtual currency is used—as a commodity or security, as property or as a vehicle to transfer value—the CFTC, U.S. Securities and Exchange Commission (SEC), FinCEN, IRS, U.S. Department of Justice (DOJ), or state regulatory and prosecutorial bodies may have an interest in regulation or enforcement.

This opinion raises the possibility of jurisdictional tension between the CFTC and the SEC, which has recently brought a number of civil enforcement actions against virtual currency issuers premised on the theory that the virtual currency in question is an unregistered security. A finding that a given virtual currency is, in fact, a commodity—rather than a security—could deprive the SEC of jurisdiction over that issuer, and vice versa with respect to instances in which a currency is deemed a security.

A further possibility, however, is that a particular virtual currency with limited or no early utility might constitute a security at the time of its issuer's initial coin offering, but later evolve into a commodity once its utility is established. The prospect exists that both the SEC and CFTC could have jurisdiction over a single virtual currency at different times in its market lifecycle.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 67



About this Author

David Axelrod Investigation Lawyer Philadelphia Ballard Spahr

David L. Axelrod is a former Supervisory Trial Counsel at the U.S. Securities and Exchange Commission's (SEC) Philadelphia Regional Office and a former federal prosecutor. At the SEC, he directed all aspects of litigation—leading complex, multi-agency investigations into a range of alleged securities law violations and serving as lead trial counsel in high-profile federal cases. He also led nationwide insider trading training for SEC enforcement staff.

Mr. Axelrod's practice focuses on representing companies and individuals under investigation by government agencies, including the U...

 Peter D. Hardy, Ballard Spahr, Philadelphia lawyer, White Collar Defense lawyer, Internal Investigations, Consumer Financial Services, Privacy and Data Security, Tax

Peter Hardy advises corporations and individuals in a range of industries against allegations of misconduct—including tax fraud, money laundering, Bank Secrecy Act, mortgage fraud and lending law violations, securities fraud, health care fraud, public corruption, Foreign Corrupt Practices Act violations, and identity theft and data breach.

Mr. Hardy has extensive trial and appellate court experience. He oversees internal investigations, advises in potential disclosures to the Internal Revenue Service, and has litigated complex criminal matters at the trial and appellate levels. He also counsels clients through every stage of a tax controversy – from audit through administrative appeal to litigation and collection.

Before entering private practice, Mr. Hardy spent more than a decade as a federal prosecutor. He served as an Assistant U.S. Attorney in Philadelphia, where he focused on fraud and tax cases. He also served as a trial attorney for the Department of Justice’s Tax Division in Washington, D.C., where he tried cases in a number of federal districts and helped write the Department's Criminal Tax Manual.

A national thought leader on the subject of criminal tax and money laundering law, Mr. Hardy is the author of  Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation, a well-reviewed and comprehensive legal treatise on the litigation of criminal tax, money laundering, and Bank Secrecy Act cases, published by Bloomberg BNA. He also serves as an adjunct professor at Villanova University School of Law, where he teaches a class on criminal and civil tax penalties in the graduate law program.

Marjoree Peerce Litigator  Criminal Defense Ballard Law FIrm

Marjorie J. Peerce is a litigator, with a practice focus on white collar criminal defense, regulatory matters, and complex civil litigation. In her more than 30 years of practice, she has handled matters across the criminal and regulatory spectrum. She is Co-Managing Partner of the firm's New York Office.

Ms. Peerce appears in New York state and federal courts, as well as in federal districts around the country. She has handled criminal and regulatory investigations concerning, for example, violations of the Internal Revenue Code, securities...

Thomas Burke Associate

Thomas F. Burke focuses his practice on internal investigations, regulatory compliance, and government enforcement defense. Tom joined the firm in 2015 after federal district and appellate clerkships and a four-year term at the New York County District Attorney's Office. As an assistant district attorney, Tom tried fourteen felony cases to verdict and supervised long-term investigations into narcotics trafficking, identity theft, and embezzlement. Tom also has expertise in complex federal constitutional law and statutory construction.


Andrew D'Aversa, Ballard Spahr, Philadelphia, Litigation White Collar Attorney

Andrew N. D'Aversa is an associate in the Litigation Department and was a summer associate with the firm in 2016. He focuses his practice on white collar defense. He has experience in matters involving money laundering and the application of state money services statutes and regulations to virtual currency and related products. Andrew maintains an active pro bono practice working with the Pennsylvania Innocence Project. Andrew is a frequent contributor to Money Laundering Watch, Ballard Spahr’s blog focused exclusively on money laundering issues.