The ongoing debate on whether virtual currencies with certain characteristics should be classified as commodities subject to regulation and enforcement by the Commodities Futures Trading Commission (CFTC) is the focal point of yet another federal case ruling this week.
In a closely watched fraud case, CFTC v. My Big Coin Pay, Inc., et al., a Massachusetts federal judge on Wednesday denied the defendants' motion to dismiss on the basis, among others, that the court lacked subject matter jurisdiction. The defendants argued that because their purported digital currency—My Big Coin—is not a tangible good and no futures trading of My Big Coin occurred, it could not fit the Commodity Exchange Act's definition of a "commodity."
Wednesday's ruling reinforces market uncertainty about the law as it applies to virtual currencies and serves as a warning about engaging in transactions in this space.
As an initial matter, U.S. District Judge Rya Zobel found the defendants' assertion of lack of jurisdiction was unfounded, and that their argument was really contesting the sufficiency of the CFTC's allegations under Fed. R. Civ. P. 12(b)(6). Judge Zobel then ruled that the CFTC easily met its burden of pleading plausible allegations of fact in support of its claims, because virtual currency futures can be—and in fact are—traded.
Judge Zobel held that because Bitcoin futures are traded, any virtual currency can be subject to futures trading, writing in her decision: "Here, the amended complaint alleges that My Big Coin is a virtual currency and it is undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin). That is sufficient, especially at the pleading stage, for [the CFTC] to allege that My Big Coin is a 'commodity' under the Act." That futures in a particular virtual currency are not currently traded was, in Judge Zobel's opinion, irrelevant.
Notably, Judge Zobel looked to U.S. Supreme Court cases interpreting federal securities law to find that the Commodity Exchange Act, and its definition of a "commodity," should be "construed not technically and restrictively, but flexibly to effectuate their remedial purposes" (quoting SEC v. Zandford, 535 U.S. 813, 819 (2002)). This reliance on the reach of the federal securities laws in assessing whether a particular virtual currency is a commodity is a sign that we may see more overlapping assessments of a virtual currency's legal status.
That is not surprising, considering how quickly decisions shaping the fate of virtual currencies are being handed down. Only two weeks ago, the U.S. District Court for the Eastern District of New York ruled that cryptocurrencies may be securities in U.S. v. Zaslavskiy. Last March, the same court granted the CFTC's request for a preliminary injunction to stop alleged fraud involving virtual currency spot markets, ruling that the CFTC had standing to sue for fraud disconnected from futures trading.
We expect that, in the upcoming months, we will see many more court decisions as well as pronouncements by regulators as this new technology is becoming more mainstream and the courts and regulators try to catch up to burgeoning industries. The tension this creates—to ensure compliance with the law, while not restraining innovation—cannot be understated. Wednesday's ruling reinforces the fact that the law is continuing to evolve, there remains uncertainty as to what law applies to virtual currencies, and different laws may apply to their different applications. Startups and investors must continue to proceed with caution as they engage in transactions in this space.
Members of Ballard Spahr's Blockchain Technology and Cryptocurrency Team are well-positioned to help clients maintain compliance with SEC and CFTC regulations. Our attorneys focus on legal areas critical to virtual currency providers, such as securities regulation and enforcement, white collar defense and investigations, anti-money laundering, tax, intellectual property, and privacy and data security.
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