CFTC and Virtual Currencies: New Court Rulings and Implications for Congress

CFTC and Virtual Currencies: New Court Rulings and Implications for Congress

Legal Sidebari

CFTC and Virtual Currencies: New Court
Rulings and Implications for Congress
Updated December 6, 2018
Over the past few months, several federal district courts have ruled in favor of the Commodity Futures
Trading Commission (CFTC) in its first wave of fraud-based enforcement actions involving Bitcoin and
other virtual currencies (also referred to as digital currencies, cryptocurrencies, digital tokens or digital
coins). With several district court judges now agreeing with the CFTC’s position that virtual currencies
are “commodities” as defined in the Commodity Exchange Act (CEA or Act), new legal authority
supports the CFTC’s efforts in enforcing against fraud and manipulation, in addition to carrying out
certain other powers, in the virtual currency realm. With these new rulings come possible new legal
questions that Congress may consider, including the decisions’ implications for the CFTC’s enforcement
authority and the overall scheme of regulation for digital coins. Moreover, as discussed further below, the
new case law, coupled with enforcement activity underway by the Securities and Exchange Commission
(SEC) with respect to digital coins, means that the CFTC shares regulatory authority in the
cryptocurrency space with several other regulators. This Sidebar addresses these issues by providing
background on the CFTC’s regulatory role and discussing the recent judicial opinions concerning its
authority over virtual currencies, before highlighting areas of potential overlap–as well as gaps–existing
in the current federal regulatory framework for virtual currencies.
CFTC Authority Under the Commodity Exchange Act
The CFTC is the primary federal agency charged with overseeing markets in derivatives—i.e., financial
contracts that “derive” their value by reference to an underlying asset (or rate or index), whose prices rise
or fall based on fluctuations in the value of that underlying asset. Derivative contracts generally stand in
contrast to, for example, contracts for the sale of a good or asset that is itself promptly delivered to the
other party. The CFTC has regulatory authority over derivatives including commodity futures, options,
and (more recently as a result of Dodd-Frank) swaps. The CEA regulates trading in commodity futures
and contains the statutory framework under which the CFTC operates. (It should be noted that the CFTC
generally does not have regulatory oversight authority over “spot” trading, as opposed to derivatives
trading, in commodities). For example, the CEA requires the registration of exchanges and platforms for
trading in certain derivatives, such as designated contract markets (i.e., futures exchanges) and swap
execution facilities (i.e., systems or platforms for multiple participants to engage in swap trading).
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The CFTC’s enforcement authority under the CEA also allows it to police against fraud and manipulation
(i.e., “any manipulative or deceptive device or contrivance”) in the sale of futures, swaps, and
commodities. This anti-fraud enforcement power is somewhat broader than the CFTC’s general oversight
authority over derivatives in the sense that it extends beyond derivatives contracts to any “contract of sale
of any commodity in interstate commerce.” The CEA’s anti-fraud provision, which Congress expanded
through Dodd-Frank, generally requires the CFTC to show that a defendant made a material false
statement or omission with scienter in connection with a relevant transaction. (Some commentators note
that it also appears the CFTC may be poised to enforce against insider trading in futures, swaps, and
commodities under this provision and the CFTC’s Rule 180.1 promulgated pursuant to Dodd-Frank.)
Recent Anti-Fraud Cases and Virtual Currencies as Commodities
As noted, over the past few months, several federal district courts have rendered favorable rulings for the
CFTC as the agency has relied on the CEA’s anti-fraud provision to combat fraudulent conduct in
connection with sales of virtual currencies. For example, in August, in CFTC v. McDonnell, the CFTC
prevailed before a federal court in New York against a trader who misappropriated customers’ funds and
made false statements regarding trading strategy and expected returns from purchases and sales of
Bitcoin. A month later, in CFTC v. My Big Coin Pay, Inc., the CFTC, before a Massachusetts federal
court, successfully opposed a motion to dismiss by defendants who had allegedly sold a virtual currency
called “My Big Coin” to customers while falsely claiming that the currency was backed by gold, could be
used wherever MasterCard was accepted, and was actively traded on currency exchanges. (A few weeks
after that ruling, in CFTC v. Gelfman Blueprint, Inc., the CFTC also obtained a default judgment against
defendants who had operated a Ponzi scheme in which they purported to execute sales of Bitcoin on
behalf of customers through a sophisticated algorithmic program.)
The McDonnell and My Big Coin decisions are notable because they relied on virtual currencies’ status as
“commodities” as the basis for the CFTC’s enforcement power under the CEA (as neither case involved
trading in derivatives), suggesting that the CFTC has broad authority to police against fraud in the sale of
virtual currencies in interstate commerce. In this regard, the CEA’s definition of “commodity” is very
broad. Given the CFTC’s historical focus on futures in agricultural commodities, the definition first
enumerates a host of agricultural goods (such as wheat, cotton, rice, etc.). A 1974 amendment to the Act,
however, expanded the definition of commodity in order to reflect the evolving futures markets, allowing
for CFTC regulation of the growing industry. The amendment therefore broadly specifies that the
definition of commodity also includes “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.” Because the
CEA’s definition of “commodity” is linked to goods and articles traded in futures markets, it has
expanded over time to include energy and metal commodities, as well as financial instruments, such as
interest rates (e.g., LIBOR), stock indices, and foreign currencies. As the U.S. Court of Appeals for the
Seventh Circuit noted in a 1982 decision, “[b]y this amendment, literally anything other than onions
[which were specifically exempted in the statute] could become a ‘commodity’ . . . simply by its futures
being traded on some exchange.”
The CFTC has taken the position that Bitcoin is a commodity for a number of years (dating back, for
example, to its Chairperson’s testimony before a congressional committee in 2014 and its finding in a
2015 administrative action that a Bitcoin options and futures trading platform violated the Act by failing
to register), a view now bolstered by the recent anti-fraud rulings. Earlier this year, Senior Judge Jack B.
Weinstein issued an opinion in the McDonnell case, in which he reasoned that the Bitcoins at issue
qualified as commodities, both under the common usage of the term (as “goods exchanged in a market for
a uniform quality and value”) and under the CEA, noting, among other things, the trading of Bitcoin
futures on certain major exchanges. Similarly, in My Big Coin, a Massachusetts federal district court
agreed with the CFTC that the virtual currency “My Big Coin” was a commodity subject to the CFTC’s

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anti-fraud enforcement because it was undisputed that “contracts for future delivery of virtual currencies
are ‘dealt in’”–namely looking to “the existence of Bitcoin futures contracts.” The court viewed virtual
currencies as a class, rejecting the defendant’s argument that My Big Coins did not qualify as
commodities because that specific virtual currency is not traded in futures markets. As a result, the logic
of My Big Coin suggests that the CEA authorizes the CFTC to regulate fraud with respect to both well-
established cryptocurrencies, like Bitcoin, as well as other burgeoning digital coins.
These rulings likely signal that the CFTC will continue to actively enforce against fraud and manipulation
in the sale of a variety of virtual currencies. In addition, while not discussed further here, the CFTC has
also ramped up efforts to tackle fraud in cases where defendants solicited virtual currency from customers
as investments, for purposes of conducting trading in derivatives or other commodities that implicate the
CFTC’s jurisdiction (for example, in CFTC v. Dean and CFTC v. Hunt). These additional cases indicate
that the CFTC has also taken an interest in fraud and manipulation involving virtual currencies more
broadly than cases strictly involving sales of the currencies themselves.
Implications for Congress
Particularly in light of the My Big Coin holding, the courts’ findings that virtual currencies are
“commodities” raises several issues that Congress may consider. First, the rulings highlight the potential
for regulatory overlap (and perhaps confusion) in the virtual currency realm. The McDonnell court
explicitly noted that, unless Congress “clarifies the matter, the CFTC has concurrent authority” over
virtual currencies along with a host of other state and federal entities, including, in varying capacities, the
SEC, the IRS, and the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
The SEC, for example, has taken the position that certain virtual currencies qualify as “securities,” subject
to the federal securities laws under its purview, depending on the facts and circumstances. (For a detailed
analysis of virtual currencies as securities and application of the federal securities laws to Initial Coin
Offerings, see this report.)
Second, the recent rulings, which solely pertained to the CFTC’s anti-fraud authority with respect to sales
of virtual currencies, underscore the current patchwork nature of federal regulation of virtual currencies.
For instance, because the CFTC generally does not have regulatory authority over spot “commodities”
markets (apart from its powers to police against fraud and manipulation), as CFTC Chairman J.
Christopher Giancarlo noted in testimony before the Senate Banking Committee earlier this year, “current
law does not provide any U.S. Federal regulator with . . . regulatory authority over spot virtual currency
platforms operating in the United States or abroad.” While some, like Chairman Giancarlo have urged
Congress to consider legislation to expand the federal regulatory role on this front, others believe that
regulation could have negative impacts by stifling growth and innovation.
Some congressional concerns regarding the regulatory framework for virtual currencies have endured in
the 115th Congress, and are likely to be the subject of further debate in the 116th. A resolution introduced
in the House of Representatives this fall entitled “Expressing support for digital currencies and blockchain
technology” stated, among other things, that “United States Federal agencies should work toward a
coordinated framework to support digital currencies . . . .” and highlighted the need to “allow[] consumer
protection while supporting future innovation.” In that vein, two bills introduced on December 6, 2018
would require the CFTC to submit reports to Congress on topics including, respectively, (1) price
manipulation in virtual currencies (H.R. 7224) and (2) regulation of virtual currency markets in the
United States as compared with other countries (H.R. 7225). Of particular relevance to the issues raised in
this Sidebar, the latter report would include a “clarif[ication] [of when] virtual currencies . . . qualify as
commodities” and “provide a new, optional regulatory structure for virtual currency spot markets.”
Other individual bills addressing virtual currency introduced in the 115th Congress have largely
focused on the specific issues of detecting money laundering through virtual currencies (for

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example, H.R. 5036) or virtual currencies’ treatment for tax purposes (for example, H.R. 3708).
Nonetheless, commentators have predicted that more comprehensive reform may soon be on the
congressional agenda.

Author Information

Nicole Vanatko

Legislative Attorney

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