Another ruling supports CFTC’s actions against virtual currency scams

Maria Nikolova

Massachusetts District Court nixes My Big Coin Pay’s attempts to dismiss a lawsuit and sides with the CFTC in finding that virtual currencies are commodities.

The United States Commodity Futures Trading Commission (CFTC) has managed to secure another ruling that supports its stance that virtual currencies are commodities and that, hence, the regulator can take actions against cryptocurrency scams.

On Wednesday, September 26th, Judge Rya W. Zobel of the Massachusetts District Court nixed a motion to dismiss a case targeting Randall Crater, his company My Big Coin Pay and a number of relief defendants.

Randall Crater and all Relief Defendants had moved to dismiss this case brought by the CFTC. The amended complaint alleges a fraudulent virtual currency scheme in violation of the Commodity Exchange Act (CEA) and a CFTC implementing regulation banning fraud and/or manipulation in connection with the sale of a commodity. The defendants’ principal argument is that CFTC fails to state a claim because My Big Coin (MBC), the allegedly fraudulent virtual currency involved in the scheme, is not a “commodity” within the meaning of the Act.

According to the CFTC allegations, Crater and the other defendants operated a virtual currency scheme in which they fraudulently offered the sale of a fully-functioning virtual currency called “My Big Coin”. In summary, the defendants enticed customers to buy My Big Coin by making various untrue and/or misleading statements and omitting material facts. The falsities included that My Big Coin was “backed by gold,” could be used anywhere Mastercard was accepted, and was being “actively traded” on several currency exchanges.

The defendants also made up and arbitrarily changed the price of My Big Coin to mimic the fluctuations of a legitimate, actively-traded virtual currency. When victims of the fraud purchased My Big Coin, they could view their accounts on a website but “could not trade their MBC or withdraw funds”. The defendants obtained more than $6 million from the scheme.

The Judge denied the defendants’ motion to dismiss the case against them, explaining that virtual currencies are commodities under the CEA.

Commodity is a defined term in the CEA, the Judge noted. It 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.”

Defendants contend that because “contracts for future delivery” are indisputably not “dealt in” My Big Coin, it cannot be a commodity under the CEA. The CFTC responds that a ‘commodity’ for purposes of the CEA definition is broader than any particular type or brand of that commodity. Pointing to the existence of Bitcoin futures contracts, the regulator argues that contracts for future delivery of virtual currencies are “dealt in” and that My Big Coin, as a virtual currency, is therefore a commodity.

The text of the statute supports the CFTC’s argument, the Judge said.

“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 plaintiff to allege that My Big Coin is a “commodity” under the Act”, the Judge said.

Judge Rya W. Zobel also referred to an earlier ruling in a similar case – that in a CFTC case against Patrick K. McDonnell and CabbageTech, Corp. d/b/a Coin Drop Markets (CDM). In that case, the defendants were charged with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin. In March this year, Judge Jack B. Weinstein of the New York Eastern District Court agreed with the CFTC and Chicago Mercantile Exchange Inc that virtual currencies are commodities under the Commodity Exchange Act (CEA), and, hence, the CFTC could take action against McDonnell and his company over virtual currency fraud.

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