On September 26, 2018, the U.S. District Court issued an order Denying a motion to dismiss a civil enforcement action alleging a fraudulent “virtual currency scheme.” Plaintiff, the Commodity Futures Trading Commission (CFTC), sued under commodity laws and enforcement regulations asserting that cryptocurrency (and trading in the futures of cryptocurrency like Bitcoin) is a commodity, and thus subject to laws and regs that govern the sale and manipulation of commodities. In their amended complaint, Plaintiffs claim Defendant “My Big Coin Pay, Inc.” violated the Commodity Exchange Act (CEA), and the CFTC regulation banning fraud or manipulation when selling a commodity. As a result, the question of “Is Cryptocurrency a Commodity?” is before the Federal Court. As the Court succinctly stated the issue at this early stage of the case:
- Therefore, to state a viable claim, plaintiff must adequately plead that My Big Coin is a commodity.
The Court’s Reasoning.
The U.S. District Court found that Plaintiff had satisfied this burden by asserting “My Big Coin is a virtual currency and it is undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin). The Court’s decision reached this conclusion by (1) examining the specific language and legislative intent within the definition of Commodity (a defined term under the CEA); and (2) analyzing “scant” caselaw on the issue.
Commodity, as defined under the CEA, includes broad categories. For example, as the Court points out, the term “livestock” is simply used generally and categorically because particular species (of animals) are not enumerated. As for the little case law on the matter, the Court relied upon a case involving natural gas “where courts have repeatedly rejected arguments that a particular type of natural gas was not a commodity because that specific type [of natural gas] was not the subject of a futures contract.” Thus, the Court need not determine if this particular cryptocurrency is a commodity; it need only decide whether virtual currency (or cryptocurrency) involves futures trading and thus the entire category could be considered a commodity.
The Defense’s Argument.
The defendants’ argued two bases in their motion to dismiss: (1) the cryptocurrency here (My Big Coin) is not a commodity as defined or within the meaning of the commodity acts; and (2) the Acts themselves do not apply since this is a case involving general fraud allegations and not market manipulation. As opposed to general fraud, market manipulation involves a deliberate attempt to interfere with the free and fair operation of a market. However, the Defendants in this case enticed customers to buy their crypto with promises that the coin was “backed by gold” and could be used anywhere Mastercard was accepted – two attractive qualities for crypto buyers or investors. However, once the Court determined that this coin was a commodity, the Court easily found that general fraud was covered by the commodity statutes. For example, the statutes specifically prohibit fraud even in the absence of market manipulation, thus general fraud as a standalone allegation was enough to state a claim under the statutes.
The Decision.
This decision is only the beginning of this enforcement action, but the decision itself may have broad implications for future cryptocurrency litigation. It seems that every day there is a new coin, option, or opportunity to invest in crypto. This decision should certainly caution those who are creating new crypto in both the formation of the crypto (subject to commodity laws), and also the representations made to investors/buyers when selling or trading the new “commodity.”
Readers can access and read the Decision published here:
https://www.cftc.gov/sites/default/files/2018-10/enfmybigcoinpayincmemorandum092618.pdf
Alex R. Hess Law Group 