Federal Judge Adopts CFTC Position That Cryptocurrencies Are Commodities

Key Points

A New York federal judge held that virtual currencies are commodities within the meaning of the Commodity Exchange Act. This marks the first court decision to assess and to adopt the CFTC's position that virtual currencies are commodities. The court elaborated that the CFTC's authority to regulate virtual currencies as commodities does not preclude other agencies, such as the SEC, from exercising power where virtual currencies function differently than derivative commodities. This is one of the first cases testing the CFTC's ability to curb alleged fraud and manipulation in the virtual-currency "cash" or "spot" markets. Last week, a New York federal judge held that virtual currencies are commodities that can be regulated by the Commodity Futures Trading Commission (CFTC), enjoining the defendants, an individual and an affiliated entity, from trading cryptocurrencies on their own or others' behalf or soliciting funds from others, and ordering an expedited accounting. CFTC v. McDonnell, No. 18-cv-0361, Dkt. 29 (E.D.N.Y. Filed Jan 18, 2018). While the CFTC announced its position that cryptocurrencies are commodities in 2015, this case marks the first time that a court has weighed in on whether cryptocurrencies are commodities. Having answered that question in the affirmative, the court went on to hold that the CFTC has jurisdictional authority over defendants' alleged cryptocurrency fraud under 7 U.S.C. § 9(1), which permits the CFTC to regulate fraud and manipulation in underlying commodity spot markets.

Regulatory Landscape

In recent months, regulators have increasingly turned their attention to cryptocurrency. Although Congress has not yet enacted a regulatory regime for virtual currency, the CFTC and the Securities and Exchange Commission (SEC) have exercised concurrent authority over virtual currency primarily by bringing enforcement proceedings.

In September 2015, the CFTC first announced its view that bitcoin and other virtual currencies are commodities within the meaning of the Commodity Exchange Act (CEA). See In the Matter of: Coinflip, Inc., CFTC No. 15-29. Initially, the CFTC targeted its enforcement efforts toward unregistered futures and swap marketplaces in virtual currencies. See, e.g., In Re TeraExchange LLC, CFTC No.15-33, 2015 WL 5658082 (Sept. 24, 2015); In re BXFNA Inc. d/b/a Bitfinex, CFTC No. 16-19 (June 2, 2016). More recently, however, the CFTC has begun targeting alleged Ponzi schemes and other frauds...