Shearman & Sterling | Fintech 2020 | Federal Court Upholds That Virtual Currencies Are Commodities
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  • Federal Court Upholds That Virtual Currencies Are Commodities
    On March 6, 2018, the United States District Court for the Eastern District of New York confirmed that virtual currencies are commodities within the anti-fraud jurisdiction of the Commodity Futures Trading Commission (CFTC).  The order, which came in the form of a preliminary injunction, follows the CFTC’s January 18, 2018 civil enforcement action against Patrick K. McDonnell and his company CabbageTech, doing business as Coin Drop Markets (CDM), alleging that McDonnell had induced customers to send money and virtual currencies to CDM in exchange for virtual currency trading advice and purchasing on customers’ behalf. The CFTC also alleged that McDonnell and CDM misappropriated investors’ funds.

    The court considered whether virtual currencies are commodities under the Commodity Exchange Act (CEA) and whether the CFTC has jurisdiction over commodity fraud that is not tied to the sale of derivatives products. The court held that virtual currencies “fall well-within the common definition of ‘commodity,’” and thus the CFTC maintains the jurisdictional authority to stop spot trade virtual currency fraud under the CEA. Further, the order clarified that the CFTC may exercise jurisdiction over spot transactions in virtual currencies when there is potential fraud, even if the fraud is not in conjunction with derivatives based on virtual currencies.

    The ruling also marks the first time that a federal court has affirmed the CFTC’s 2015 determination that virtual currencies are commodities as defined by the CEA. This provides the CFTC with further standing to police fraud in virtual currency spot markets. Given the recent rhetoric from CFTC commissioners, the CFTC is expected to continue to pursue similar enforcement actions.
    However, the court’s opinion does not differentiate among “virtual currencies," treating Bitcoin, initial coin offerings (ICOs) and tokens as all subject to the CFTC's authority. Moreover, the court's opinion suggests that other regulatory authorities, including the Securities Exchange Commission (SEC), the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and state regulators, can assert concurrent jurisdiction with the CFTC over such virtual currencies. We would expect issues such as scope of authority to be refined as they further develop. In the meanwhile, market participants should review the range of laws and regulations that could apply to their activity and the regulatory authorities that could assert jurisdiction.