CME seeks to intervene in Bitcoin scam case, insists that virtual currencies are commodities

Maria Nikolova

A court ruling that Bitcoin is not a commodity would substantially disrupt the settled expectations of CME and numerous market participants who are trading bitcoin futures, CME warns.

Chicago Mercantile Exchange Inc., a part of CME Group Inc (NASDAQ:CME), is seeking to intervene in a case against a virtual currency scam as a possible court ruling may challenge the treatment of Bitcoin and its likes as commodities under the Commodity Exchange Act (CEA).

The case in question is captioned Commodity Futures Trading Commission v. McDonnell et al (1:18-cv-00361) and was launched by the CFTC at the New York Eastern District Court in January this year. In brief, Defendants Patrick K. McDonnell, of Staten Island, New York, and CabbageTech, Corp. d/b/a Coin Drop Markets (CDM), a New York corporation, are charged with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.

The CFTC has insisted that Bitcoin and other virtual currencies are commodities under the CEA. The regulator has now found a “legal friend” with regard to this claim – that is CME. On Monday, March 5, 2018, CME requested the Court to permit it to file the so-called Letter as Amicus Curiae. An amicus curiae is someone who is not a party to a case and is not solicited by a party, but who assists a court by offering information that bears on the case.

The proposed Letter, seen by FinanceFeeds, warns the Court of the grave consequences if Bitcoin and its likes do not have the status of commodities under the CEA.

CME informs the Court of the reliance CME and financial market participants have placed on the determination by the CFTC in 2015 that virtual currencies such as bitcoin are “commodities” within the meaning of Section 1a(9) of the CEA. As a result of that determination, the CFTC exercises exclusive jurisdiction over derivatives products—futures and options—based on virtual currencies.

If the Court rules that a virtual currency such as bitcoin is not a commodity, this would put in jeopardy CME’s and its market participants’ expectation to rely on the CEA and the CFTC’s regulatory protections for commodity derivatives contracts based on virtual currencies.

This legal uncertainty would substantially disrupt the settled expectations of CME and numerous market participants who are trading bitcoin futures for purposes of hedging cash market exposures or making a market in bitcoin futures by offering liquidity, in addition to market professionals that clear, broker or manage virtual currency futures trading activity.

Such a ruling could be interpreted to reverse the CFTC’s determination, and if followed ultimately could raise questions regarding whether CME’s bitcoin futures contract is a valid and regulated futures contract under the CEA.

If CME were forced to delist the bitcoin contract it listed late in 2017, it could lose the investment it made in developing the product. More importantly, holders of bitcoin futures contracts may be be forced to liquidate their positions unexpectedly—possibly at unfavorable prices—and thereby forced to terminate prematurely market making opportunities and hedging and investment strategies. The full financial implications of such consequences for many market participants are unknown, CME warns.

The Court has the right to decide on whether to admit the information provided by amicus curiae.

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