The Commodity Futures Trading Commission (“CFTC”) and the SEC are flexing their regulatory muscles to rein in securities and commodities rules violations by start-up companies in the virtual currency space. On September 17, 2015, the CFTC settled charges against SF-based company, Coinflip, Inc. (“Coinflip”) for violations of the Commodity Exchange Act. Just a week later, the CFTC also settled charges against a temporarily registered swap facility, TeraExchange LLC (“TeraExchange”), for failing to enforce its rules against wash trading. Similarly, the SEC has brought several enforcement cases against bitcoin operators within the past 18 months, after declaring that interests tied to the value of virtual currencies are securities subject to SEC regulation. The agencies’ increasing interest in regulating and enforcing rules around digital currencies comes amid growing acceptance of virtual currency like bitcoin, as well as a massive run-up in price for bitcoin this month.

The CFTC’s action against Coinflip is noteworthy as the first time that the agency has held in an enforcement case that bitcoin and other virtual currencies are commodities subject to the Commodity Exchange Act. Coinflip operated an online platform for about 400 buyers and sellers of bitcoin-based derivatives, called Derivabit. In its order, the CFTC found that Coinflip and its chief executive officer, Francisco Riordan, failed to comply with CFTC regulations and the Commodity Exchange Act, including regulations requiring registration of facilities dealing in commodity transactions. The charges were settled without monetary sanctions. The Coinflip and TeraExchange cases follow a statement from CFTC Chairman Timothy Massad in December 2014 that “[d]erivative contracts based on a virtual currency represent one area within our responsibility.”

The SEC also has been steadily staking out its territory as an enforcer of securities laws for interests tied to the value of virtual currencies. Following its May 2014 Investor Alert detailing the risks of virtual currency, the SEC brought several enforcement actions against bitcoin industry operators. In addition, news reports and court filings reveal that the SEC is investigating GAW Miners (“GAW”) and its Chief Executive Officer, Josh Garza. The investigation is examining whether GAW’s sales of its mining technology product and virtual currency, paycoin, violated the anti-fraud provision and other provisions of securities laws. Significantly, a number of the SEC enforcement investigations are being conducted by members of the SEC’s Digital Currency Working Group, indicating that enforcement resources are flowing into investigations focused on the virtual currency arena.

The Bottom line: Digital currency like bitcoin will continue to attract innovators and will continue to gain acceptance. But as the CFTC’s Director of Enforcement recently said, “innovation does not excuse those operating in this space from following the same rules.” Regulatory agencies like the SEC and CFTC will continue elbowing each other to assert enforcement jurisdiction over the virtual currency market. Companies and individuals operating in this space should be prepared to deal with changing regulations and the potential for multiple agencies attempting to regulate the same transactions or conduct.