The Commodity Futures Trading Commission (“CFTC”) obtained an important court win and boost to its regulatory authority over Cryptocurrencies this month. A federal district court in Massachusetts recently issued a decision in CFTC v. My Big Coin Pay Inc. which affirmed the CFTC’s position that all virtual currencies are commodities and subject to CFTC jurisdiction. The opinion follows another recent district court opinion in New York, CFTC v. McDonnell, in which a court also interpreted the Commodity Exchange Act (“CEA”) to find that cryptocurrencies constitute a commodity under the CEA. CFTC Chairman Giancarlo in a speech last week in Minneapolis further emphasized the CFTC is continuing to increase civil enforcement actions with 83 having been filed in the last CFTC fiscal year resulting in over $900 million in civil penalties. The current political efforts to dismantle the Dodd Frank Act apparently have done little to slow down the CFTC Division of Enforcement, in particular when it comes to regulating cryptocurrencies.
In January 2018, the CFTC Division of Enforcement brought suit against My Big Coin Pay Inc. (“Big Coin”). The case arose from an alleged fraudulent scheme in which Big Coin sold “fully functioning” virtual currency it claimed was backed by gold and could be used anywhere where Mastercard was accepted. The CFTC alleged that once bought, the coins could not be traded or sold except through a Ponzi scheme run by Big Coin. To hide this fact, the CFTC alleges, the Big Coin operators would, among other things, artificially change the coin “price” on the “exchange” to make it appear as a functioning market. In its Complaint, the CFTC alleged that under the CEA it had authority to regulate cryptocurrencies like Big Coin contending that cryptocurrencies constitute a “commodity”.
In challenging the lawsuit, the defendants claimed that the CFTC lacked jurisdiction to bring the case arguing that Big Coin was not a commodity as it did not underlie a futures contract, and that there was no market manipulation that the CFTC could regulate. The court rejected the defendants’ arguments finding that Big Coin was a commodity under the CEA because cryptocurrencies are goods “in which contracts for future delivery” are dealt. In doing so, the court rejected the contention that each cryptocurrency must be considered separately based on its own merits to determine application of the CEA and instead chose to look at cryptocurrencies as a whole. The court pointed to the CEA’s broad definition of “commodity” and found that courts focus on categories – not specific items – when determining whether the “dealt in” clause of the CEA applies. Whether Big Coin was traded or not was not a determinative factor for the court’s analysis. According to the court, because some cryptocurrencies, such as bitcoin, are used for futures trading, cryptocurrencies as a whole are commodities. Since Big Coin is a cryptocurrency, and cryptocurrencies in general are commodities, the court found this sufficient for Big Coin to be considered a commodity under the CEA. The court analogized this situation to natural gas – noting that it is well settled that just because one particular type of natural gas does not get traded on a futures market does not mean that it is not a commodity, since natural gas as a whole fits within the definition of a commodity. The court held that the same legal reasoning should be applied to cryptocurrencies. It dismissed the argument that whether a particular cryptocurrency is traded as not determinative whether it is a commodity under the CEA.  The court further rejected the defendant’s argument that the CFTC did not have enforcement jurisdiction because there was a lack of “market manipulation” surrounding Big Coin and found the CEA has provisions prohibiting fraud even when there is no market manipulation.
CFTC Chairman Giancarlo has made clear that CFTC enforcement activities will continue at an aggressive pace. The recent district court opinion in CFTC V. My Big Coin, Inc. has further reinforced the CFTC’s firepower under the CEA to regulate cryptocurrencies. In the meantime, other governmental agencies, including the SEC and state attorneys general, are also looking at ways to flex their regulatory authority over cryptocurrencies. The political efforts to dismantle Dodd – Frank are having little effect on enforcement activity when it comes to cryptocurrencies. As more courts weigh in on this nascent fintech industry, it can be expected that the winners in court will be the regulators, as they continue to assert their authority over the new economic landscape.