On September 26, 2018, Judge Rya W. Zobel of the United States District Court for the District of Massachusetts denied a motion to dismiss a complaint filed by the Commodity Futures Trading Commission (“CFTC”) that alleged fraud in violation of the Commodity Exchange Act (“CEA”) arising out of the “My Big Coin” virtual currency. See CFTC v. My Big Coin Pay, Inc., Case No. 1:18-cv-10077 (D. Mass. Sept. 26, 2018) (Memorandum of Decision). The motion to dismiss, filed by various individual defendants, argued principally that My Big Coin is not a “commodity” within the meaning of the CEA, making the CEA’s prohibitions on fraud and market manipulation inapplicable.
The CFTC’s amended complaint alleged that defendants enticed customers to buy My Big Coin by making untrue and/or misleading statements and omitting material facts, including that My Big Coin was backed by gold, could be used anywhere that MasterCard was accepted, and was being “actively traded” on several currency exchanges. According to the complaint, defendants also made up and arbitrarily changed the price of My Big Coin to mimic the fluctuations of a legitimate virtual currency. Defendants allegedly obtained more than $6 million from their scheme by selling My Big Coin to users but not allowing the users to trade or withdraw funds.
The CEA defines “commodity” to include “goods and articles … in which contracts for future delivery are presently or in the future dealt in.” The CFTC argued that My Big Coin was a commodity by drawing a comparison to Bitcoin futures contracts and arguing that contracts for future delivery of virtual currency (like My Big Coin) are “dealt in,” rendering it a commodity. In concluding that the text of the statute supported the CFTC’s argument, Judge Zobel reasoned that the CEA defines “commodity” “generally and categorically, not by type, grade, quality, brand, producer, manufacturer, or form.” Id. at 6 (quotation marks omitted). According to Judge Zobel, this “broad approach” to defining “commodity” accords with Congress’s goal of strengthening federal regulation of the commodity futures trading industry. Id.Although rejecting the CFTC’s argument that My Big Coin is a commodity under the CEA by virtue of being a “good” or “article” even absent a contract for future delivery, Judge Zobel held that the CEA only requires the existence of futures trading within a certain class in order for all items within that class to be considered commodities. Id. at 6 n.5. As further support, Judge Zobel cited to a recent case in the United States District Court for the Eastern District of New York and two CFTC Dockets that found that virtual currencies are commodities under the CEA. See e.g., “Eastern District of New York Grants Preliminary Injunction in Opinion Backing CFTC’s Authority to Regulate Cryptocurrency,” available at https://www.lit-wc.shearman.com/eastern-district-of-new-york-grants-preliminary-i.
While all virtual currencies are different, this is yet another decision finding that the CFTC has authority over the virtual currency markets in general, and will likely reinforce its interest in policing individual offerings. Indeed, James McDonald, the CFTC Director of Enforcement, touted the “important” ruling, noting that it adds to the body of case law recognizing that the CFTC has the power to prosecute fraud with respect to at least certain virtual currencies, and vowing to continue to police the markets on which virtual currencies are traded.