In Commodity Futures Trading Commission v. My Big Coin Pay, Inc., --- F. Supp. 3d ---, 2018 WL 4621727 (D. Mass. Sept. 26, 2018), the Massachusetts District Court determined that the Commodity Futures Trading Commission ("CFTC") sufficiently alleged the virtual currency known as My Big Coin ("MBC") is a commodity and denied the defendants' motion to dismiss.
The CFTC alleged that the defendants "enticed customers to buy [MBC]," a virtual currency, "by making various untrue and/or misleading statements and omitting material facts." 2018 WL 4621727, at *1. Specifically, the CFTC alleged that the defendants claimed MBC "was 'backed by gold,' could be used anywhere Mastercard was accepted, and was being 'actively traded' on several currency exchanges." Id. According to the CFTC, the "[d]efendants also made up and arbitrarily changed the price of [MBC] to mimic the fluctuations of a legitimate, actively-traded virtual currency." Id. Purchasers of MBC "could view their accounts on a website but 'could not trade their MBC or withdraw funds . . . ." Id.
The CFTC filed a complaint alleging the defendants violated Section 6(c)(1) of the Commodities Exchange Act ("CEA"), 7 U.S.C. § 9(1) and CFTC Regulation 180.1(a), 17 C.F.R. § 180.1(a). Generally speaking, section 6(c)(1) of the CEA and CFTC Regulation 180.1(a) prohibit fraud involving commodities. After a temporary restraining order and preliminary injunction were entered, the CFTC amended its complaint and the defendants filed a motion to dismiss on the grounds that MBC was not a commodity and, therefore, not subject to those regulations. The court determined that to survive the motion to dismiss, the CFTC "must adequately plead that [MBC] is a commodity." 2018 WL 4621727, at *3.
The CEA defines "commodity" as a list of numerous agricultural products, "all other goods and articles, . . . and motion picture box office receipts . . . , and all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in." 7 U.S.C. §1a(9). The defendants argued MBC was not a commodity "because 'contracts for future delivery' are indisputably not 'dealt in.'" 2018 WL 4621727, at *3. In other words, according to the defendants, "the specific item in question must itself underlie a futures contract" in order to fall within the CEA's definition of a commodity. The CFTC contended the CEA's definition of commodity was broader and argued "that contracts for future delivery of virtual currencies are 'dealt in' and that [MBC], as a virtual currency, is therefore a commodity." Id.
The court concluded that the CEA "define[d] 'commodity' generally and categorically" as opposed to "'by type, grade, quality, brand, producer, manufacturer, or form'" and, therefore, supported the CFTC's argument. Id. at *4 (citations omitted). The court further observed that the way Congress defined commodity in the CEA "signals an intent that courts focus on categories-not specific items-when determining whether the 'dealt in' requirement is met." Id. Recognizing that there is very little case law on the issue, the court concluded the available case law supported the CFTC's argument. Id. (comparing cases discussing whether natural gas constituted a commodity). The court explained that the available decisions "align with [CFTC's] argument that the CEA only requires the existence of futures trading within a certain class . . . in order for all items within that class . . . to be considered commodities." Id. The court, therefore, found that by alleging MBC "is a virtual currency and it is undisputed that there is a futures trading in virtual currencies (specifically involving Bitcoin)," the CFTC sufficiently alleged that MBC was a commodity within the meaning of the CEA.
Finally, the defendants argued that, even if MBC is a commodity, the CFTC's complaint should be dismissed because Section 6(c)(1) of the CEA and CFTC Regulation 180.1(a) were designed to regulate fraudulent market manipulation. See id. at *5. The defendants contended that the actions alleged in the complaint were mere sales puffery and, therefore, not violations of Section 6(c)(1) of the CEA and CFTC Regulation 180.1(a). See id. The court, however, found that "both Section 6(c)(1) and Regulation 180.1 explicitly prohibit fraud even in the absence of market manipulation." Id. The court further observed "[c]ourts have accordingly recognized CFTC's power to prosecute fraud under these provisions." Id. With this decision, the District of Massachusetts joins several other courts that have found cryptocurrencies are commodities.
CFTC Director of Enforcement James McDonald stated earlier this week that the decision "confirms the authority of the CFTC to investigate and combat fraud in the virtual currency markets. . . , recognizes the broad definition of commodity under the CEA, and also [acknowledges] that the CFTC has the power to prosecute fraud with respect to commodities including virtual currencies." Press Release, U.S. Commodity Futures Trading Commission, Federal Court Finds that Virtual Currencies are Commodities, Release No. 7820-18 (Oct. 3, 2018), available at https://www.cftc.gov/PressRoom/PressReleases/7820-18. McDonald further stated the CFTC "will continue to police these markets in close coordination with our sister agencies." Id. McDonald's comments regarding the decision suggest we will see more CFTC enforcement actions in the future.