US District Court rules virtual currencies are commodities

by Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP

On March 6, 2018, the Eastern District of New York was the first federal court to rule that virtual currencies, also referred to as cryptocurrencies, are commodities under the Commodity Exchange Act (CEA) and that the Commodity Futures Trading Commission (CFTC) has the authority to regulate virtual currencies under its anti-fraud and anti-manipulation enforcement authority.1 Judge Jack B. Weinstein agreed with the CFTC’s interpretation of its enforcement power and granted a preliminary injunction against the defendants for engaging in deception and fraud in virtual currency spot markets.

In January 2018, the CFTC brought an action against Patrick K. McDonnell and CabbageTech, Corp. (d/b/a Coin Drop Markets) for operating a “deceptive and fraudulent virtual currency scheme,” committing fraud by misappropriating investors’ funds, and making misrepresentations through offering false trading advice and promising future profits. The CFTC alleges the following: (1) customers paid Coin Drop Markets with the understanding that they would be provided exit prices and profits of 300% each week; (2) after receiving the membership payments, Coin Drop Markets provided little to no trading advice; (3) customers never received the return on their investments; and (4) the defendants refused to return membership fees and investments, and instead misappropriated the funds.

The defendants moved to dismiss the CFTC’s complaint, arguing that the CFTC lacks jurisdiction to regulate virtual currencies and therefore lacks standing to sue the defendants for alleged violations of the CEA. The court broke this issue down into two separate questions:

1. Can virtual currency be regulated as a commodity under the CFTC’s enforcement authority?
2. Does the CEA allow the CFTC to exercise jurisdiction over fraud where the underlying commodities do not directly involve futures or derivative contracts?

The court answered both questions in the affirmative, finding that the CEA’s definition of “commodity” includes virtual currencies and that the CFTC can pursue fraud and manipulation claims in spot or physical markets.

A. Virtual Currencies Defined as a Commodity

Perhaps recognizing that its opinion was on an issue of first impression, the court went through a rather painstaking analysis both of virtual currencies themselves, and of the CFTC’s jurisdiction to regulate virtual currencies. The court started with the statute that grants the CFTC “[e]xclusive jurisdiction over ‘accounts, agreements … and transactions involving swaps or contracts of sale of a commodity for future delivery.’”2 In considering whether virtual currencies fall within the scope of “commodity,” the court turned initially to Black’s Law Dictionary3 and to commentators who have argued that virtual currencies should be treated as commodities based upon “common usage” and the argument that they provide a “store of value” and serve as “a type of monetary exchange.”4

The court also considered the CEA’s definition of “commodity,” which includes within its scope “all services, rights, and interests … in which contracts for future delivery are presently or in the future dealt in.”5 The opinion noted that goods beyond agricultural commodities — such as services, rights, interests, and intangible commodities — are also within the CEA’s scope, and stated that virtual currencies fall “well-within” both the common definition and the CEA definition.6 In addition, the court noted the CFTC’s 2015 administrative order in In the Matter of Coinflip, Inc.,7 finding that virtual currencies can be classified as commodities, and the multiple subsequent statements by the CFTC to the same effect.8

B. Jurisdiction over Spot Markets

The CFTC has full regulatory authority over the futures and derivative markets. In this case, the court also determined that the CFTC’s fraud and manipulation authority reached spot transactions not involving a futures trade, but the court noted that the CFTC can have jurisdiction over spot markets only in a limited set of circumstances where there is manipulation or fraud. In doing so, the court cited the regulatory authority under Section 9(1) of the CEA and the authority under 17 C.F.R. § 180.1, which prohibits “any person, directly or indirectly, in connection with any … contract of sale of any commodity in interstate commerce” from using a “manipulative device, scheme, or artifice to defraud ….” The court noted that the portion of Section 180.1 delegating oversight authority over any “contract of sale of any commodity in interstate commerce” allows the CFTC to enforce its anti-fraud measures in cases not directly involving futures trades, but the court was clear that the CFTC does not have authority over cash or spot transactions not involving fraud or manipulation.

C. CFTC’s Concurrent Jurisdiction Over Virtual Currencies

In making this ruling, the court was careful to note that its ruling in favor of the CFTC was not intended to establish exclusive CFTC jurisdiction over virtual currencies. After listing the various agencies that have stepped in to provide at least partial regulation — including the Department of Justice and state criminal agencies, the CFTC, the SEC, the Treasury Department’s Financial Enforcement Network (FinCEN), the IRS, private exchanges, and state regulators — the court stated expressly, “the jurisdictional authority of CFTC to regulate virtual currencies as commodities does not preclude other agencies from exercising their regulatory power when virtual currencies function differently than derivative commodities.”9


The court’s decision in CFTC v. McDonnell is important because it is the first time a federal court has held that virtual currencies can be regulated as commodities under the CEA and that the CFTC has anti-fraud and anti-manipulation jurisdiction over these commodities even if not directly involved in futures and derivatives contracts. This holding confirms the CFTC’s view of its jurisdiction while recognizing that the world of virtual currencies, and activities related to their use, is not exclusively the CFTC’s to regulate.


1Commodity Futures Trading Comm’n v. McDonnell, No. 1:18-cv-00361-JBW-RLM, slip op. (E.D.N.Y. Mar. 6, 2018) (mem. and op.).

2Id. at 16 (quoting 7 USC § 2).

3 BLACK’S LAW DICTIONARY (10th ed. 2014) (defining a commodity as “an article of trade or commerce”).

4McDonnell, slip op. at 17-18.

5 7 U.S.C. § 1(a)(9).

6McDonnell, slip op. at 19, 24.

7 In the Matter of: Coinflip, Inc., CFTC Docket No. 15-29 (Sept. 17, 2015) (“Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.”)

8McDonnell, slip op. at 19-20; see Written Testimony of Chairman J. Christopher Giancarlo before the Senate Banking Committee (Feb. 6, 2018),

9McDonnell, slip op. at 24.

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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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