On September 26, 2018, a federal judge in Massachusetts agreed with the Commodity Futures Trading Commission’s (“CFTC”) view that virtual currencies are commodities under the Commodity Exchange Act (“CEA”) and subject to federal regulation. See CFTC v. My Big Coin Pay, Inc., No. CV 18-10077-RWZ, 2018 WL 4621727 (D. Mass. Sept. 26, 2018). This decision will allow the CFTC to continue policing not only futures contracts and swaps involving virtual currencies, but also fraud or manipulation of virtual currencies traded in interstate commerce.
The CFTC sued a virtual currency company and several affiliated companies and individuals alleging fraud and misappropriation in the sale of the virtual currency “My Big Coin.” The CFTC claims that defendants perpetrated a $6 million fraud by falsely representing to purchasers that My Big Coin was “backed by gold,” could be used anywhere Mastercard was accepted, and was being “actively traded” on several currency exchanges. Id. at *1. Certain of the defendants filed a motion to dismiss the action arguing that the virtual currency involved in the scheme is not a commodity as defined under the CEA and asserting that the CFTC lacks jurisdiction. The defendants also claimed that even if the virtual currency is a commodity, there was no fraud, but merely garden variety puffery, and therefore there was no violation of the CEA. In denying the motion to dismiss, the judge determined the CEA defines commodities broadly so as to encompass virtual currencies, and that virtual currencies may fall within the CFTC’s purview when they involve fraud, manipulation, or a derivative component. The case may now move forward as a result of the ruling.
My Big Coin Pay is the second federal court decision to embrace that virtual currencies are commodities under federal law. In CFTC v. McDonnell, No. 1:18-cv-00361-JBW-RLM, 2018 WL 1175156 (E.D.N.Y. Mar. 6, 2018), decided earlier this year, the primary issue before the court was whether the CFTC had standing to sue the defendants under the CEA. To resolve this issue, the court similarly had to determine whether a virtual currency may be regulated by the CFTC as a commodity. The court found that the term “commodity” encompasses virtual currency “both in economic function and in the language of the statute” because virtual currencies are “‘goods’ exchanged in a market for a uniform quality and value.” Id. at *1, *12. As such, the court reasoned that they “fall well-within” the CEA’s broad definition of a commodity.
The CFTC has concluded, and two federal courts have agreed, that virtual currencies are commodities as defined by the CEA. On October 17, 2017, the CFTC published a “Primer on Virtual Currencies,” which noted that “[t]here is no inconsistency between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivative contracts depending on the particular facts and circumstances.” More explicitly, the court in McDonnell stated that “[u]ntil Congress clarifies the matter,” the CFTC has “concurrent authority” along with other federal and state administrative agencies—including the SEC—and civil and criminal courts over transactions in virtual currency. McDonnell, 2018 WL 1175156, at *3. Companies in the virtual currency space should expect the CFTC to continue overseeing these markets in coordination with other federal and state agencies.