CFTC against crypt scammers: Value or Merchandise.
This week, a federal district judge in the United States ruled that a supposedly fraudulent crypt token meets the definition of merchandise. This brought the case to the sphere of competence of the Commission on Trade in Futures Commodities (CFTC), which has long argued that virtual currencies are commodities. Here is what it means; and how the regulatory body has been supporting its position on the legal status of cryptocurrencies.
Are the cryptocurrencies merchandise or values? Well, they can be both
The regulatory approach to cryptocurrencies in the United States is complex. While Congress has the supreme power over federal regulatory agencies such as the Securities and Exchange Commission (SEC) and the CFTC, to date it has not issued any guidance on the subject.
Because there is no definitive set of rules that all agencies can comply with, each regulator adopts its own approach, although it clashes with other perspectives. That is, the SEC considers cryptocurrencies as securities, while the CFTC treats them as merchandise, and both control bodies have tried to affirm their views in the courts.
However, these different approaches seem to coexist. As CFTC Commissioner Brian Quintenz explained to Bloomberg in October 2017, “the crypto-tents offered in a pre-sale can be transformed, they can start their life as a SEC-regulated value from a capital raising perspective, but then at some point -perhaps quickly or even immediately- they become a commodity “. In February 2018, the agencies held a joint session on their roles in crypto-industry, in which they mentioned that they were willing to work together to create a regulatory framework.
In addition, in May 2018, the CFTC Commissioner, Rostin Behnam, delivered a speech that further emphasized the growing collaboration between his agency and the SEC: “I spoke about my position on the CFTC and the efforts of the SEC to harmonize the Given the large number of doubly registered market participants and the overlapping of policies, there is a real opportunity for the CFTC and the SEC to harmonize redundant standards and leave both those involved in the market and regulators in a strongest position. “
Soon after, in June, the Finance Director of the SEC Corporation, William Hinman clarified that his agency does not see Bitcoin (BTC) or Ethereum (ETH) as values, because they have been largely decentralized “in their current state “, and that would focus on the Initial Offers of Currencies (ICOs).
The CFTC, in turn, has been arguing that virtual currencies are a commodity covered by the Trade in Goods Act (CEA) since 2015. Citing the document, the agency claims that cryptocurrencies are closer to gold than to gold. Conventional currencies or securities, since they are not backed by the government and do not have liabilities linked to them.
In July 2017, the CFTC granted approval for the first time to negotiate Bitcoin futures. The agency authorized an institutional trading and compensation platform for Bitcoin derivatives, Ledgerx, as a stock exchange and Bitcoin clearinghouse fully regulated within the framework of the CEA:
“By unanimous vote of the Commission, an order has been issued granting Ledgerx, LLC (Ledgerx) the registration as a derivative compensation organization under the Trade in Goods Act (CEA) […] Under of the order, Ledgerx will be authorized to provide compensation services for fully guaranteed digital currency swaps. “
CFTC against the Crypto Scammers
On September 26, Judge Rya W. Zobel, of the Massachusetts District Court, rejected a motion to dismiss a case against Randall Crater and his company My Big Coin Pay Inc. That secured another victory for the CFTC’s perspective regarding that cryptocurrencies are merchandise.
The CFTC argued that the Crater company, based in Nevada, My Big Coin Pay, was a crypt scheme in which they offered to sell a “fully functioning” virtual currency called “My Big Coin” (MBC). According to the details of the case, the defendants attracted customers to buy MBC making false statements. Specifically, they lied about the fact that MBC was “backed by gold,” could be used wherever the MasterCard card was accepted, and was “actively traded” in several bags. The regulator argued that this violated the Law of Exchange of Goods (CEA).
In addition, it was also alleged that the defendants had “arbitrarily” manipulated the value of MBC to imitate the price fluctuations of an adequate cryptocurrency. Investors could see their account balance on the website, but “they could not negotiate their MBC or withdraw funds.” My Big Coin Pay affiliates obtained more than $ 6 million from a total of 28 investors as a result of these actions.
Crater’s lawyers tried to dismiss the CFTC case, arguing that the token was neither a tangible asset nor a service on which the futures contracts were based and that, therefore, it should escape the scope of the regulator. They supposedly also compared the token with Bitcoin in the process.
Zobel ruled in favor of categorizing both MBC and BTC as virtual currencies in which “future delivery contracts are currently being treated”. Essentially, Zobel accepted the CFTC’s argument that, for the purposes of the CEA, a “merchandise” is broader than any particular type or brand of that merchandise, noting also the existence of Bitcoin futures contracts:
“Here, the amended claim alleges that My Big Coin is a virtual currency and that it is indisputable that there are futures trades in virtual currencies (specifically involving Bitcoin). That is enough, especially at the pleading stage, for the plaintiff claim that My Big Coin is a “merchandise” according to the Law”. The CFTC has already demonstrated that virtual goods are, in fact, goods.
Thus, in March 2018, US District Judge Jack Weinstein of the Eastern District Court of New York oversaw the CFTC case against Patrick McDonnell and his company, Coin Drop Markets (CDM). According to the agency’s claim, CDM customers never received the financial advice they paid, as well as the fact that CDM was never registered with the CFTC.
Weinstein agreed with the CFTC that virtual currencies are merchandise under the CEA and, therefore, the CFTC could take action against McDonnell and his company for virtual currency fraud. More specifically, the judge confirmed that determination arguing that it was supported by the simple meaning of the word “merchandise” and that the CFTC had “ample room for maneuver” to interpret federal law.
In August, the CFTC won the injunction to permanently ban another company related to the crypts directed by Patrick McDonnell, called CabbageTech Corp. for “audacious and vicious fraud.” Similar to the case of Massachusetts, McDonnell argued that the CFTC did not have the authority to regulate its commercial operations. The judge rejected that claim and ordered the defendant to pay $ 290 429 in restitution and $ 871 287 in fines.
Will the CFTC regulate more in the near future?
Despite having achieved a couple of crucial victories in the courts, the CFTC still approaches the crypt fraudsters on a case-by-case basis. It seems that the regulator still lacks the power to detect and prohibit massively questionable points of sale, but it is also important to note that the CFTC has been handling cryptocurrencies with care. In fact, in a September interview with CNBC, the president of the CFTC, Christopher Giancarlo, stressed that crypts need a “do no harm” approach by regulators to flourish:
“I advocate the same approach to cryptocurrencies and everything that has to do with this new digital revolution of markets, currencies and asset classes.”
Nonetheless, Giancarlo distinguished between the CFTC’s short-term approach to dealing with criminal activity in the crypto-market and the long-term decisions of the control body on the development of policies for the industry: “When it comes to fraud and manipulation, We need to be strong, when it comes to policy making, I think we should be slow and deliberate and well informed. “
The recent actions of the CFTC are seen as part of a more general trend of US regulators, which extend their reach into crypto-industry over the past few months. Even so, there are no signs of complete legislation for crypts in the near future. In May, Giancarlo stated that he does not see a framework of this kind coming soon from the federal level, noting that the statutes governing the CFTC were drafted in 1935, and that the adoption of something “so new and innovative” “As the Bitcoin within these terms will take its time.
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