On September 26, 2018, a federal court in the District of Massachusetts found that virtual currencies are a commodity under the Commodity Exchange Act, 7 U.S.C. § 1 et seq, (“CEA”). This marks the second time that a court has accepted the Commodity Futures Trading Commission’s (“CFTC”) position and upheld the agency’s authority to regulate unleveraged and unmargined spot transactions in virtual currency under the agency’s anti-fraud and manipulation enforcement authority. Most notably, however, the reasoning behind its decision potentially expands the scope of the CFTC’s oversight of the market.
According to the complaint in CFTC v. My Big Coin Pay, Inc., from 2014 to 2017 the defendants fraudulently obtained from their customers more than six million dollars through deceptive and manipulative marketing of My Big Coin (“MBC”). Customers were told that MBC was a virtual currency backed by gold and actively traded on several currency exchanges – all representations that were allegedly false. Instead, the defendants purportedly fabricated price fluctuations to mimic those of a legitimate virtual currency and customers could not trade the MBC they purchased. The defendants also allegedly fraudulently touted a partnership between MBC and MasterCard, claiming to have reached an agreement that would allow customers to hold a prepaid MasterCard attached to their MBC e-wallets.
In January 2018, the CFTC brought civil suit seeking injunctive relief and monetary penalties. The defendants had sought to dismiss the complaint, arguing that MBC could not be a commodity under the CEA because “‘contracts for future delivery’ are not ‘dealt in’” MBC. The CFTC urged the court to hold that MBC qualified as a commodity simply because futures contracts in Bitcoin exist. The district court agreed with the CFTC and upheld the viability of the CFTC’s complaint.
In its opinion, the court determined that the CEA defined “‘commodity’ generally and categorically” and concluded that Congress’ approach “signals an intent that courts focus on categories ⸺ not specific items ⸺ when determining whether the ‘dealt in’ requirement is met.” Citing the CEA’s legislative history, the court further noted that its interpretation was consistent with Congress’ goal of strengthening the overall regulation of commodity markets. Finally, the court drew support for its interpretation from prior cases involving natural gas, in which courts found that natural gas was a “commodity” because one type of natural gas was the subject of futures contracts and natural gas was otherwise fungible and moved freely throughout a national pipeline system. Based on this analysis, the court 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.” Since bitcoin futures are traded, the CFTC’s authority to police fraud and manipulation schemes therefore extends to all virtual currencies, including MBC even though MBC futures were not traded on any exchange and MBC is not fungible with bitcoin.
Although this is not the first case to uphold the CFTC’s regulatory authority with respect to virtual currencies, it is nonetheless notable because the MBC court’s interpretation of “commodity” could, if adopted by other courts, expand the CFTC’s regulatory reach. The first federal case to evaluate the issue, CFTC v. McDonnell, held that virtual currencies are commodities in the context of a fraudulent scheme involving bitcoin itself, as did the CFTC’s prior enforcement actions involving Coinflip (bitcoin options contracts) and BXFNA (leveraged or margined bitcoin trading). In the MBC case, however, the court expanded the CFTC’s enforcement authority beyond just regulating fraud and manipulation in the bitcoin spot market.
While this decision will aid the CFTC’s “inten[t] to be very aggressive” in policing the virtual currency area, its expansive definition of commodity may have an impact outside of the market for virtual currencies. Under the court’s reasoning, the CFTC could now bring any good, article, service, right or interest under its anti-fraud regulatory authority so long futures on an underlier in the same category are traded. Moreover, the court’s treatment of all virtual currencies as belonging to the same category, without regard to their fungibility, seems like a misapplication of the natural gas precedent cited by the court. For example, would the court also consider all foreign currencies, all securities indexes, or all interest rates to fall within the CFTC’s spot market jurisdiction, even absent fungibility with the currencies, indexes, or rates that underlie CFTC-regulated futures contracts? What exactly constitutes a “category,” and, therefore, how far the scope of the term “commodity” can be pushed, remains to be seen and may become an issue in future CFTC regulatory enforcement actions and private litigation under the Commodity Exchange Act.