Virtual currencies as commodities - CFTC wins battle in the fight to define cryptocurrencies as commodities but has it won the war?

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP

Recently, a United States District Court in Massachusetts ruled in favor of the US Commodity Futures Trading Commission’s (CFTC) argument that a virtual currency (My Big Coin or MBC) is a “commodity” within the meaning of the Commodity Exchange Act (CEA) and affirmed the ability of the CFTC to pursue actions alleging commodities fraud in the absence of market manipulation.1

The CFTC brought an action against the operators of My Big Coin Pay, Inc. (My Big Coin Pay) for running a fraudulent virtual currency scheme in violation of the CEA.2 As alleged, the defendants enticed customers to invest in My Big Coin Pay by making false statements, including that MBC is a fully functioning virtual currency “backed by gold,” is accepted everywhere that Mastercard is accepted, and is traded on several currency exchanges.3 To further garner interest, the defendants allegedly gave My Big Coin a similar name to the well-known virtual currency “Bitcoin.”4

The defendants brought a motion to dismiss for lack of jurisdiction arguing that MBC is not a commodity because MBC does not “underlie a futures contract.” Additionally, defendants argued that even if MBC is a commodity, the CFTC lacks the jurisdiction under its anti-fraud authority to pursue deceptive practices absent market manipulation.5 The CFTC, on the other hand, argued that MBC fits within the broad definition of “commodity” in the CEA and that it has the authority to pursue cases based solely on commodities fraud.6

This is not the first time the CFTC has classified a virtual currency (i.e., Bitcoin) as a commodity. In September 2015, the CFTC issued an order against Coinflip, Inc. for conducting activity related to commodity options transactions without complying with the CEA and CFTC regulations. In the order, the CFTC explained that “Bitcoin and other virtual currencies are encompassed in the definition [of ‘commodity’] and properly defined as commodities.”7

According to the CEA, a “commodity” includes “all . . . goods and articles . . . and all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.”8 There are no futures contracts for MBC. However, the CFTC pointed to Bitcoin futures contracts, arguing that “contracts for future delivery of virtual currencies are ‘dealt in’ and that MBC, as a virtual currency, is a commodity.”9

The court agreed with the CFTC’s argument that courts, in defining “commodity,” should focus on categories—not specific characteristics—when determining whether contracts for future delivery are dealt in presently or in the future. Agreeing that the definition of “commodity” should be expansive, particularly when the CFTC is exercising its anti-fraud authority, the court held that “the CEA only requires the existence of futures trading within a certain class” (e.g., virtual currencies) “in order for all items within that class” (e.g., Bitcoin and MBC) to be considered commodities.10

The court looked to admittedly “scant caselaw” that found natural gas to be a class of commodities. In those cases, the courts rejected arguments that particular natural gas was not a commodity because the natural gas was not located at the geographic location underlying the natural gas futures contract. Rather, natural gas was found to be “fungible” and a commodity regardless of its location in the pipeline system.11

The CFTC defined “virtual currency” in its complaint to mean “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction.”12 The court accepted the CFTC’s view that MBC and Bitcoin are both virtual currencies, as defined by the CFTC, with common characteristics. Finding the CFTC’s pleading sufficient, the court held that the CFTC adequately alleged that MBC was in the category of virtual currencies for which a futures contract is dealt in (i.e., Bitcoin futures) and denied defendants’ first ground for dismissal.13

The court also denied defendants’ second ground for dismissal, determining that the CFTC has jurisdiction over deceptive or fraudulent practices absent market manipulation. Citing to support provided by several cases, the court explained that both CEA Section 6(c)(1) and CFTC Regulation 180.1 prohibit fraud even in the absence of market manipulation.14

All “virtual currencies” are not alike
Over the past few years, courts and regulators have struggled to classify virtual currencies in the vast world of digital assets. It may be more appropriate to describe all virtual tokens as crypto-assets because tokens are used in very different ways. The Securities and Exchange Commission (SEC), in its 2017 report on Initial Coin Offerings, recognized that the way crypto-assets are used can determine their classification.15

Others in the industry have also recognized the importance of categorizing crypto-assets by their function. For example, a recent paper suggested classifying crypto-assets into three groups when developing a virtual currency framework:

  • Crypto-transaction tokens: designed for transacting value; e.g., Bitcoin; these tokens are the closest to pure “digital currencies.”
  • Crypto-voucher tokens: designed to carry the right to a predefined asset; e.g., Filecoin, which will carry the right to be exchanged for data storage space.
  • Crypto-fuel tokens: designed to enable the creation of blockchain-supported applications; e.g., Ethereum, which enables users to write smart contracts which program a non-human participant to behave in a rule-based way in response to changes in the network.16

The differentiation among crypto-assets is important when considering the applicability of the court’s opinion to other “virtual currencies.”

The court’s opinion regarding MBC should not be read so broadly as to apply to all crypto-assets. On a motion to dismiss, the court was required to accept as true the allegations that MBC and Bitcoin are virtual currencies with common characteristics. When it comes to the thousand or more different crypto-asset tokens in circulation, it is not so clear that they all function as a medium of exchange, a unit of account or a store of value in the nature and category of Bitcoin. Further, the court’s opinion does not provide sufficient guidance to conduct what would be a fact-based analysis of other crypto-assets. Importantly, the court also noted that the definition of a virtual currency that it relied on was provided “[f]or the purposes” of the complaint at issue.

When faced with defining crypto-assets that are not touted as substitutes for fiat currencies, other courts may not find the MBC court’s reliance on “scant caselaw” helpful. The court put MBC in the same category as Bitcoin and analogized this virtual currency category to the category of natural gas located anywhere in the natural gas pipeline system. A finding that “gas is gas” as a commodity category may not be an appropriate analogy when applied to all crypto-asset tokens that do not have characteristics that are common with Bitcoin.

There is one clear takeaway from the court’s decision. Courts continue to find that CEA Section 6(c)(1) and Regulation 180.1 prohibit fraud even where there is no allegation of market manipulation.

1Commodity Futures Trading Commission v. My Big Coin Pay, Inc. et al (1:18-cv-10077), Mem. of Decision, ECF No. 106.

2Id. at 1.

3Id. at 2.

4 Am. Compl. at ¶ 26, ECF No. 63.

5Supra note 1, at 1.

6Id. at 4, 9.

7 In re Coinflip, Inc., Dkt. No. 15-29 (CFTC Sept. 17, 2015);

8 7 U.S.C. § 1a(9).

9Supra note 1, at 5. The CFTC also attempted to sidestep the futures contract requirement by alternatively arguing that goods and articles qualify as commodities absent contracts for future delivery. The court rejected this argument, in a footnote, explaining that the futures contract requirement applies to goods and articles as well as services, rights and interests.

10Id. at 8.

11Id. at 7 – 8.

12Supra note 4, at ¶ 25. The remainder of the CFTC’s description of virtual currencies identified the fact that virtual currencies are not legal tender and briefly described how the distributed ledger and blockchain technologies underlying nearly all crypto-assets worked.

13Supra note 1, at 11.

14Id. at 9 – 10.

15 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Release No. 81207 (July 25, 2017);

16 “Developing a Virtual Currency Assessment Framework: Function over Form,” Andrew Burnie, James Burnie and Andrew Henderson, Ledger:

[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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