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The U.S. District Court for the Eastern District of New York determined that "the CFTC's antifraud authority unambiguously applies broadly to the use or attempted use of any manipulative or deceptive device in connection with a contract of sale of any commodity in interstate commerce, including the virtual currencies at issue." The case involved a CFTC enforcement action against a virtual currency investment adviser for fraud and misappropriation in connection with purchases and trading of bitcoin and litecoin. The Court, rejecting arguments that the CFTC lacked jurisdiction and standing, imposed permanent trading and registration bans on the defendants and ordered them to pay more than $871,000 civil penalties and $290,000 in restitution.
Commentary / Bob Zwirb
The significance of this case is in establishing jurisdiction. The fraud involved here, as Judge Weinstein observed, was of the ordinary "boiler room" variety. What is noteworthy, however, is the Court's endorsement of the CFTC's authority to act. As Judge Weinstein wrote in his opinion: "If the Commission is ultimately found to be without jurisdiction and standing, this case should be dismissed."
The Court's analysis to support that position is significant in three respects. First, in an earlier stage of the proceeding, the Court ruled that that virtual currency was a "commodity" within the meaning of the CEA. CFTC v. Patrick K. McDonnell and Cabbagetech, Corp. d/b/a Coin Drop Markets, Case No. 18-CV-361 (E.D.N.Y. Mar. 6, 2018). While the CFTC had made a similar assertion three years earlier, such a determination has more weight coming from a disinterested venue such as a federal court than from the agency itself. In addition, ruling that virtual currency is a commodity provides the legal building block for bringing this type of case. Second, the Court expressly considered and affirmed the CFTC's authority to bring an enforcement action here, holding that such authority "extends [not only] to fraud or manipulation in the virtual currency derivatives market . . . [but also to] its underlying spot market." Third, while upholding that authority, the Court was careful to distinguish between the CFTCs regulatory, as opposed to its enforcement authority, over virtual currency in a cash spot market. As Judge Weinstein observed:
The CFTC was not seeking authority to regulate trading in virtual currencies. It was seeking only to stop and to prevent ongoing fraud. See CCN, CFTC Does Not Regulate Retail Crypto Markets: Chairman Chris Giancarlo, Bitcoin Politics, ECF No. 156, July 26, 2018 ("The United States Commodity Futures Trading Commission (CFTC) Commissioner J. Christopher Giancarlo has stated that the agency's [intent] is not to exercise regulatory jurisdiction over cryptocurrency trading markets and other cash markets, but to deal with fraud. . . .").
The significance of this ruling, therefore, results not only from the application of the expansive definition of "commodity" in the CEA to virtual currency, but also to the affirmation that the CFTC may go after fraud in the cash or spot market, a venue that until recently was beyond its jurisdictional reach.
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