United States: Federal Judge Recognizes CFTC Jurisdiction Over Virtual Currency Fraud

The U.S. District Court for the Eastern District of New York held that virtual currency is a "commodity" within the meaning of the CEA. The Court declared that the CFTC has the authority to pursue fraudulent activities involving that commodity even if the fraud does not involve a futures contract or other derivatives transaction of a type that is the primary subject of the CFTC.

The Court's conclusion was based, in part, upon an interpretation of CEA Section 6(c), which makes it "unlawful for any person to: use or employ, in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, any manipulative device or contrivance." The Court stated: "CFTC has jurisdictional authority to bring suit against defendants utilizing a scheme to defraud investors through a 'contract [for] sale of [a] commodity in interstate commerce. . . . Although the CFTC has traditionally limited its jurisdiction primarily to "future' contracts for commodities, its expansion into spot trade commodity fraud is justified by statutory and regulatory guidelines." (Order at pps. 25-26.)

As previously covered, the CFTC filed a complaint against Patrick K. McDonnell and his company, CabbageTech Corp. d/b/a Coin Drop Markets (collectively, "Defendants"). As alleged by the CFTC, the Defendants solicited money and cryptocurrency transfers from customers in exchange for virtual currency trading advice.

Commentary / Steven Lofchie

If the CFTC has jurisdiction over any cash market transaction involving any "commodity" (bearing in mind that virtually everything is a commodity), then the CFTC's antifraud jurisdiction is virtually unlimited in scope. At a minimum, the CFTC has antifraud jurisdiction over energy products, agricultural products and metals.

A few questions follow: Did Congress really intend to provide the CFTC with such broad jurisdiction? Should the CFTC's jurisdiction be this broad? And how will, or should, the CFTC exercise this jurisdiction given the limits of its staffing and, as to commodities that have a primary regulator, the authority of that other regulator?

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