Federal Judge Affirms CFTC’s Authority to Police Virtual Currency Fraud

On September 26, 2018, the U.S. District Court for the District of Massachusetts issued an order confirming that the Commodity Futures Trading Commission (CFTC) maintains the authority to police virtual currency fraud.  The order was issued in response to a motion to dismiss charges against My Big Coin Pay, Inc. and several individuals for operating a fraudulent virtual currency scheme through which they solicited customers to purchase a virtual currency known as My Big Coin (MBC).

The CFTC’s initial enforcement order, filed in January 2018, accused the defendants of operating a fraudulent virtual currency scheme through which they solicited more than $6 million from customers throughout the U.S. by making false and misleading claims that MBC was actively being traded, was backed by gold and could be used anywhere MasterCard credit cards were accepted.  The defendants also were alleged to have misrepresented MBC’s daily trading price in reports on its website, when no daily trading price existed because MBC was not actively being traded.

The defendants’ attorneys sought to have the case thrown out on the basis that the CFTC has no authority to police virtual currency fraud since virtual currencies do not meet the definition of a “commodity” under the Commodity Exchange Act (CEA), and that in any case, the CFTC’s anti-fraud authority extended only to fraudulent market manipulation. 

However, Judge Rya Zobel claimed that MBC is in fact a commodity under the CEA, as the term “commodity” includes a “host of specifically enumerated agricultural products as well as ‘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.’”  Judge Zobel determined that the law applies to broad categories of such products, and since bitcoin futures currently trade on exchange, by extension, bitcoin and other virtual currencies, including MBC, fit the definition of “commodities.”  Judge Zobel also rejected the defendants’ argument regarding the limits of the CFTC’s anti-fraud authority with respect to commodities, maintaining that the CEA “explicitly prohibit[s] fraud even in the absence of market manipulation.”

This court order, along with a similar order issued by the U.S. District Court for the Eastern District of New York in March 2018, should solidify the CFTC’s standing to police virtual currency fraud going forward.  We will continue to monitor developments in this case and any additional updates provided by the courts and regulators clarifying the virtual currency regulatory framework.