Under the Commodity Exchange Act ("CEA"), the Commodity Futures Trading Commission regulates the trading of futures, options and swaps on "commodities." The CEA defines "commodity" to include, among other things, "all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in." 7 U.S.C. § 1a(9). The CEA prohibits any person from operating a facility for the trading or processing of commodity swaps unless the facility is registered as a swap execution facility ("SEF") or as a designated contract market ("DCM"). See 7 U.S.C. § 7b-3(a)(1).
The CEA provides the CFTC with enforcement jurisdiction to investigate and conduct civil enforcement action against fraud and manipulation in both cryptocurrency derivatives markets and in underlying cryptocurrency spot markets. The CEA makes it unlawful for any person, "directly or indirectly, to use or employ, or attempt 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 or deceptive device or contrivance, in contravention of such rules and regulations as the Commission shall promulgate by not later than 1 year after July 21, 2010 . . . ." 7 U.S.C. § 9(1). [emphasis added]. The CEA also makes it unlawful for any person, "directly or indirectly, to manipulate or attempt to manipulate the price of any swap, or of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity." 7 U.S.C. § 9(3). [emphasis added].
On September 17, 2015, the CFTC ruled that "virtual currencies" are commodities subject to CFTC regulation. In an enforcement order issued by the CFTC against Coinflip, Inc., a bitcoin swap transactions firm, the CFTC stated that "[b]itcoin and other virtual currencies are encompassed in the definition and properly defined as commodities." See In re Coinflip, Inc., d/b/a Derivabit, CFTC Docket No. 15-29 (Sep. 17, 2015). The CFTC stated that Coinflip, Inc. violated the CEA by operating a facility for the trading or processing of commodity options without registering with the CFTC as a SEF or DCM.
On March 6, 2018, a U.S. District Court upheld the authority of the CFTC, under 7 U.S.C. § 9(1) to take enforcement action against a contract of sale of a virtual currency in interstate commerce. See CFTC v. CabbageTech, Corp., No. 18-CV-361 (E.D.N.Y. March 6, 2018).
On October 4, 2017, the CFTC stated that "virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances." The CFTC stated that it "looks beyond form and considers the actual substance and purpose of an activity when applying the federal commodities laws and CFTC regulations." The CFTC noted that examples of prohibited digital currency activities include (i) price manipulation of a virtual currency traded in interstate commerce, (ii) pre-arranged or wash trading in an exchange-traded virtual currency swap or futures contract, (iii) a virtual currency futures or option contract or swap traded on a domestic platform or facility that has not registered with the CFTC as a SEF or DCM, and (iv) "certain schemes involving virtual currency marketed to retail customers, such as off-exchanged financed commodity transactions with persons who fail to register with the CFTC." CFTC Primer on Virtual Currencies, at p. 13 - 14 (October 4, 2017).
On December 1, 2017, Chicago Mercantile Exchange Inc. ("CME") and CBOE Futures Exchange, LLC ("CFE") self-certified contracts for bitcoin futures products, and Cantor Futures Exchange, L.P. ("Cantor") self-certified a contract for bitcoin binary options. The Chairman of the CFTC, in announcing the self-certifications, stated: “Bitcoin, a virtual currency, is a commodity unlike any the Commission has dealt with in the past. As a result, we have had extensive discussions with the exchanges regarding the proposed contracts, and CME, CFE and Cantor have agreed to significant enhancements to protect customers and maintain orderly markets. In working with the Commission, CME, CFE and Cantor have set an appropriate standard for oversight over these bitcoin contracts given the CFTC’s limited statutory ability to oversee the cash market for bitcoin.”
|Date||CFTC Guidance and Orders|
|07/06/2017||CFTC Order of Registration for Ledger X as a Swap Execution Facility|
|07/24/2017||CFTC Order of Registration for Ledger X as a Derivatives Clearing Organization|
|10/04/2017||CFTC Primer on Digital Currencies|
|12/01/2017||CFTC Statement and Backgrounder on Self-Certified Contracts for Bitcoin Products|
|02/15/2018||CFTC Advisory - Beware Virtual Currency Pump and Dump Schemes|
|05/21/2018||CFTC Advisory - Virtual Currency Derivative Product Listings|
On January 18, 2018, the CFTC filed two federal civil enforcement action complaints in the U.S. District Court for the Eastern District of New York, which alleged that two companies engaged in fraudulent schemes to steal cryptocurrency from their customers. The CFTC charged CabbageTech, Corp. (d/b/a Coin Drop Markets) with engaging in a fraudulent scheme to induce customers to send cryptocurrency to Coin Drop Markets, purportedly in exchange for real-time cryptocurrency trading advice and for cryptocurrency trading on behalf of the customers. The CFTC also charged another company, The Entrepreneurs Headquarters, Limited, with engaging in a fraudulent scheme to solicit bitcoin from members of the public, misrepresenting that customers’ funds would be pooled and invested in products including binary options, misappropriating the funds of commodity pool participants, and failing to register with the CFTC as a Commodity Pool Operator. The CFTC's complaints are set forth below.
|01/16/2018||CFTC Complaint - Enforcement Action Against My Big Coin Pay, Inc.|
|01/16/2018||U.S. District Court of D. Mass. - Temporary Restraining Order Against My Big Coin Pay, Inc.|
|01/18/2018||CFTC Complaint - Enforcement Action Against CabbageTech, Corp.|
|01/18/2018||CFTC Complaint - Enforcement Action Against The Entrepeneurs Headquarters, Limited|
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