Federal Court Rules that Virtual Currencies Are Commodities
Just a few short hours ago from the time of writing, the CFTC (U.S. Commodity Futures Trading Commission), announced that virtual currencies are to officially considered commodities by the United States’ government.
Below, is the tweet, in full from the verified CFTC Twitter account:
For some reason, there were a slew of comments underneath the post that asserted that this ruling was ‘bullish’ in nature.
However, the context of the ruling in question was not bullish in nature at all. In fact, if anything, it appears that the sole reason that cryptocurrency was given this designation was to expand the federal government’s authority to prosecute ‘scam artists’ that are committing fraud.
What is This All About?
If you’re a little lost as to what this is all about, don’t worry — many people still are.
If you noticed, on the tweet that the CFTC sent out, they included a link. That link can be seen below:
_My Big Coin (MBC), was a commodity under the Commodity Exchange Act (CEA) because the CFTC alleged that MBC “is a…_www.cftc.gov
That link will bring you to the CFTC’s official website where the press release bearing more comprehensive information behind the CFTC’s tweet can be found.
In just the very first paragraph, it states,
“ On September 26, 2018, Senior Judge Rya W. Zobel of the U.S. District Court for the District of Massachusetts, entered an order holding that the Commodity Futures Trading Commission (CFTC) has the power to prosecute fraud involving virtual currency and denying the defendants’ motion to dismiss the CFTC’s amended complaint.”
The keywords here to pay attention to are, “…Order holding that the Commodity Futures Trading Commission (CFTC) has the power to prosecute fraud involving virtual currency…”
Criminal Proceedings With ‘My Big Coin’
The distinction of digital currencies as commodities arose from a case that the CFTC raised against a project called ‘My Big Coin’.
Personally, I’ve never heard of the project before and I’m not sure whether it ever received that much attention in the crypto realm. However, it most certainly received enough attention to land on the radar of the CFTC, and, due to the results of whatever investigation that they conducted on this project, the CFTC decided that it was appropriate to criminally prosecute them for their action.
My Big Coin’s defense in this case appeared to be that the CFTC did not have the proper jursidiction to pursue such criminal measures. They argued that, because they were not technically considered to be a ‘commodity’, that the case had to be placed under the SEC’s purview. Had the judge ruled in their favor, then this would have been the case and it would have substantially changed the legal landscape and risk that cryptocurrencies face going forward.
But this is not what happened. Instead, the judge ruled that digital currencies can be considered ‘commodities’, and as such, can now be placed firmly under the CFTC’s regulatory scope.
What makes this decision a big deal is that, rather than getting the proverbial ‘slap on the wrist’ and a light fine to pay without an admission of guilt, projects must now face serious charges from the United States federal government that could result in the loss of their freedom.
Also, the fraud that crypto projects can be prosecuted for no longer must be relegated to market manipulation as it has to be with the SEC. Now, any and all acts of fraud that are committed by crypto projects can be prosecuted.
In this specific case, the CFTC had brought charges against My Big Coin due to its belief that,
“Since at least January 2014, the defendants operated a fraudulent virutal currency scheme in which they solicited customers to purchase a fully-functioning virtual currency, MBC, by repeatedly making false and misleading claims about its value, usage, trade status, and financial backing.”
“The defendants lied that MBC could be bought, sold, donated, used to make purchases, and was actively trading. To give the illusion that MBC was a safe bet, Defendants also lied that MBC was backed by millions of dollars in gold, and would be used to stabilize the economies of twenty-two countries, as alleged in the amended complaint.”
“Defendants misappropriated customer funds by conning people into giving them more than $6 million for what Defendants represented was a fully-functioning virtual currency. Defendants allegedly used these misappropriated funds to purchase a home, antiques, fine art, jewelry, luxury goods, furniture, interior decorating and other home improvement services, travel, and entertainment.”
So, the allegations are pretty clear in this instance and it appears that the CFTC will more than likely be successful in their case.
It’s worth noting that the CFTC is looking for full restitution for the victims as well as the re-acquisition of any and all assets that are related to My Big Coin and the company. Thus, this would be several steps greater than a mere ‘fine’ that would be leveled by the SEC (Securities and Exchanges Commission), and would be complete and total insolvency immediately upon judgment as well as a permanent ban from ever registering a similar company in the American markets again.
Commodity v. Security
Many uninformed Twitter users decided to praise the court’s decision to deem virtual currencies (notice the keyword: ‘currencies’ in the decision) to be a commodity.
Below, is an example of the sample dialogue in the crypto community that evolved following the decision’s announcement:
Unfortunately, this is not ‘super bullish’.
Why isn’t This Super Bullish?
For a few reasons.
#1 — The CFTC did not Stipulate All Digital Assets, Just Digital Currencies
This is perhaps the most important reason. Not every single cryptocurrency can be considered a digital currency. In the case of ‘My Big Coin’, they appealed to consumers as a payment currency.
However, other ‘platform-based’ cryptocurrencies, or projects that are clearly using ICOs and the markets to fundraise for ideas where the token would not be used simply as a transfer of value but as more of a funding vehicle for an idea that may or may not come to the fruition in the future that has nothing to do specifically with being a payment currency, but rather an ‘access’ currency to a particular platform or application could still fall under the SEC’s purview.
#2 — The CFTC Has a Much Broader Scope on What They Can Prosecute For
As noted in the litigation against ‘My Big Coin’, the CFTC can pursue projects for merely misrepresenting the project’s purpose. This is something that the SEC doesn’t really do.
The SEC is more concerned with whether rules and regulations were followed, while the CFTC digs into the heart of whether the cryptocurrency ‘works’ or not and whether it is effective. If they deem that it isn’t and that the crypto was misrepresented in some way, then they move forward with the decision to prosecute the project and, often, they have the ability to enact enforcement measures that are far more extreme in nature than what one would see from the SEC (Securities and Exchange Commission).
Those in the crypto sphere should see this as the beginning of increased regulatory pressure on the crypto community rather than a release of some sort.
This action makes it clear and without equivocation that the United States (among other jurisdictions) are beginning to get ‘fed up’ with the malfeasance of the crypto community and are now looking to become more proactive in their enforcement of regulations.
This is something that should have been expected that has been a long time in the making at this point.
Investors should exercise increasing caution moving forward.