Federal Court Grants Preliminary Injunction, Affirms CFTC Jurisdiction over Virtual Currencies

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Earlier this month, Judge Jack B. Weinstein of the U.S. District Court for the Eastern District of New York entered a preliminary injunction order against Patrick McDonnell and his company, CabbageTech, Corp. (together, the “Defendants”). In a landmark ruling, the order upheld the CFTC’s position that “virtual currencies” are commodities subject to CFTC jurisdiction under the Commodities Exchange Act.

The preliminary injunction was issued in response to a CFTC complaint from late-January (discussed here),which alleged that the Defendants defrauded and misappropriated funds from customers in connection with the purported provision of virtual currency investment and trading services involving Bitcoin and Litecoin. According to the CFTC, the Defendants promised as much as 300% return on an investment in less than a week, then shut down all communications once they received funds from numerous customers.

While the CFTC has brought several actions against allegedly fraudulent cryptocurrency-based schemes, their authority to do so had never been ruled upon by a federal court— until now.

In ordering the preliminary injunction, Judge Weinstein found that, “[u]ntil Congress clarifies the matter, the CFTC has concurrent authority, along with other state and federal administrative agencies, and civil and criminal courts, over dealings in virtual currency.” Furthermore, Judge Weinstein affirmed that the CFTC’s jurisdiction over virtual currencies extends beyond transactions involving futures or derivatives thereon; and that, as in the case of CabbageTech, the CFTC possesses anti-fraud and anti-manipulation enforcement authority over interstate contracts of sale for virtual currency itself.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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