NY Court sides with CFTC, CME over status of virtual currencies

Judge Jack B. Weinstein of the New York Eastern District Court on Tuesday agreed with the Commodity Futures Trading Commission (CFTC) and Chicago Mercantile Exchange Inc that virtual currencies are commodities under the Commodity Exchange Act (CEA).

In a Memorandum & Order, the Judge agreed that virtual currencies should be treated as commodities and that CFTC has standing to exercise its enforcement power over fraud related to virtual currencies sold in interstate commerce.

The Order was a part of a fraud case brought by the regulator against Patrick K. McDonnell, of Staten Island, New York, and CabbageTech, Corp. d/b/a Coin Drop Markets (CDM), a New York corporation. The defendants are charged with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.

On Tuesday, March 6, 2018, the Court granted a preliminary injunction is granted in favor of the CFTC. The Judge concluded that without an injunction there is a reasonable likelihood that defendants will continue to violate the CEA.

The Commission has presented a prima facie case for the purpose of obtaining a preliminary injunction based on the fact that the defendants have engaged or are engaging in violations the Act and Commission Regulations. Also, the Commission has demonstrated a reasonable likelihood of future violations by the defendants.

Under the terms of the preliminary injunction the defendants and persons/entities related to them, are restrained, enjoined, and prohibited until further order of the court, from in connection with any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity, using or employing, or attempting to use or employ, any manipulative device, scheme, or artifice to defraud; making any untrue or misleading statement of a material fact or to omit to state a material fact necessary in order to make statements made not untrue or misleading; and engaging, or attempting to engage, in any act, practice, or course of business, which operates or would operate as a fraud or deceit upon any person.

Defendants are also restrained from directly or indirectly destroying, mutilating, erasing, altering, concealing or disposing of, in any manner, directly or indirectly, any documents that relate to the business practices or business or personal finances of any defendant.

In its amicus letter, CME informed 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 had ruled that a virtual currency such as bitcoin was not a commodity, this would have 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.