Federal Court Ruling Recognizes CFTC Jurisdiction over Cryptocurrencies as Commodities

March 23, 2018

The U.S. Commodity Futures Trading Commission (CFTC) scored a victory in its effort to assert jurisdiction over portions of the cryptocurrency and initial coin offering (ICO) markets last week, as a federal district judge preliminarily enjoined defendants charged with operating a fraudulent virtual currency scheme in violation of the Commodity Exchange Act (CEA).

The lawsuit, CFTC v. McDonnell, et al., is one of the first of its kind, with the CFTC alleging that the defendants fraudulently induced customers to send money and virtual currencies “in exchange for purported virtual currency trading advice” and for virtual currency trades on their behalf. Upon receiving payments from several customers, the defendants allegedly cut off communications and kept the funds. At the heart of the CFTC’s claim is the assertion that cryptocurrencies are commodities subject to the jurisdiction of the CFTC, a proposition the court accepted when, on March 6, it granted an injunction in favor of the CFTC. Judge Weinstein found that the CFTC had shown a reasonable likelihood that the defendants would continue to violate the CEA” and that the law permitted the CFTC to assert “jurisdiction over fraud that does not directly involve the sale of futures or derivative contracts” but instead involves the underlying of futures or derivatives contracts. The ruling lends further credence to the recent expansion of regulatory authority over cryptocurrency and related products and services.

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