A federal court has ruled that the Commodity Futures Trading Commission has the power to prosecute fraud involving virtual currency.
The Sept. 26 ruling was handed down by Senior Judge Rya Zobel of the U.S. District Court for the District of Massachusetts.
“This is an important ruling that confirms the authority of the CFTC to investigate and combat fraud in the virtual currency markets,” CFTC Director of Enforcement James McDonald said in a statement.
Agreeing with the CFTC’s arguments, the Court held that the CFTC had sufficiently alleged that the particular virtual currency at issue, My Big Coin (MBC), was a commodity under the Commodity Exchange Act.
The CFTC alleged that MBC “is a virtual currency, and it is undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin).” According to the Court, the term “commodity” “includes a host of specifically enumerated agricultural products as well as ‘all other goods and articles . . . and all services rights and interests . . . in which contracts for future delivery are presently or in the future dealt in.”
The Court specifically agreed with the CFTC that “Congress’ approach to defining ‘commodity’ signals an intent that courts focus on categories—not specific items.”
Zobel rejected the Defendant’s argument that the CFTC’s anti-fraud authority over MBC extended only to fraudulent market manipulation, holding that the “broad language in the statute” “explicitly prohibit[s] fraud even in the absence of market manipulation.”
These holdings are consistent with the decisions obtained by the CFTC earlier this year in the case of CFTC v. McDonnell in the Eastern District of New York.
The order arises from a CFTC federal court enforcement action.
The CFTC’s amended complaint alleged that, since at least January 2014, the defendants operated a fraudulent virtual 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.”
As alleged, 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, the CFTC claims, 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.
The amended complaint also alleged that 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.
In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws, as charged.