The showdown between the CFTC and My Big Coin Pay is a legal nerd’s dream. There are discussions of legislative history going back to the Futures Trading Act of 1921, discussions of legislative intent, case law and an agency’s own “speaking orders” interpreting its statutes and regulations, and finally, grammar. Even better, it’s all in the context of the complicated regulatory regime for virtual currencies or cryptocurrencies. Could the determination of whether the CFTC has jurisdiction over virtual currencies really rest on the placement of a comma?
To recap, the CFTC filed a complaint against My Big Coin Pay, Inc. and related individuals and entities under seal in federal court in the U.S. District Court for Massachusetts on January 16, 2018. The complaint alleges that My Big Coin Pay, Inc. made false statements or materials omissions in connection with the issuance of a virtual currency, My Big Coin. The alleged false statements included: (1) that My Big Coin was being actively traded on several currency exchanges, when it was not; (2) issuing reports reflecting daily trading prices, when no trading was occurring; (3) misrepresenting that My Big Coin was backed by gold, when it was not. The CFTC also claimed that My Big Coin Pay, Inc. misappropriated “virtually all” of the approximately $6 million that it solicited from customers.
The CFTC alleged that My Big Coin Pay defendants had engaged in fraud in violation of Section 6(c)(1) of the Commodity Exchange Act (7 U.S.C. § 9(1)) and CFTC Regulation 180.1(a) (17 C.F.R. § 180.1(a)) because they had engaged in fraud in connection with a “commodity” in interstate commerce. Without any real explanation, the CFTC asserted that “[v]irtual currencies are encompassed in the definition of ‘commodity’ under Section 1a(9) of the Act.”
Defendant Randall Crater and some of the relief defendants, who were alleged to have received some of the misappropriated funds, filed a motion to dismiss the complaint on March 30, 2018.
Instead of responding to the motion to dismiss, the CFTC filed an amended complaint on April 20, 2018. It added additional allegations related to the fraud but failed to address the specific concerns raised in the motion to dismiss.
The My Big Coin Pay defendants filed another motion to dismiss on May 4, 2018, making the same arguments as before: My Big Coins are not commodities because there are no futures contracts. They alleged that the CFTC did not have jurisdiction over the My Big Coin because it did not fall within the definition of a “commodity.”
Commodity is defined as:
The term “commodity” means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions (as provided by section 13–1 of this title) and motion picture box office receipts (or any index, measure, value, or data related to such receipts), and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.
After going through the legislative history of the Futures Trading Act of 1921, Grain Futures Act of 1922, and Grain Futures Act of 1936 – which eventually became the Commodity Exchange Act and was later amended – the My Big Coin defendants argued that Congress had concerns about the breadth of the CFTC’s jurisdiction. As a result, Congress added the phrase “in which contracts for future delivery are presently or in the future dealt in,” because the mission and purpose of the CFTC is to act as the “single regulatory agency responsible for futures trading.” As such, the term “commodity” applies to only those items for which there are futures contracts available. Therefore, unlike the Bitcoin transactions discussed by the court in CFTC v. McDonnell, where the court found that the CFTC did have jurisdiction and where there is an existing market for Bitcoin futures, there are no futures contracts for the My Big Coin. As a result, My Big Coins are not “commodities” within the meaning of the Commodity Exchange Act.
The CFTC filed an opposition on May 18, 2018, arguing that the phrase “in which contracts for future delivery are presently or in the future dealt in” modified “as a matter of syntax, punctuation, and grammar only ‘services, rights and interests’” and not “all other goods and articles.” The My Big Coin is a “good” or “article” and therefore a commodity, whether or not futures contracts for it exist. The CFTC went on to argue that even if the My Big Coin were a “service, right or interest,” it would still be a commodity, because futures contracts exist in similar virtual currencies and therefore futures contracts are currently “dealt in.” The CFTC also addressed the legislative history argument by stating that the concerns regarding the CFTC’s breadth of jurisdiction were raised by the Department of Treasury in connection with off-exchange foreign currency futures trading and were addressed separately. The phrase “in which contracts for future delivery are presently or in the future dealt in” was already in the bill at the time that the concern was raised and was not amended in response to the Treasury’s concern. As such, the defendants’ argument was misleading.
On May 25, 2018, the My Big Coin Pay defendants sought leave of court to file a reply to the CFTC’s opposition to the motion to dismiss. The My Big Coin Pay defendants argued that they should be allowed to respond because the CFTC stated “for the first time, that virtual currency is actually a ‘good or article’ and is therefore a commodity under the [Commodity Exchange Act]. This argument is an about-face from the CFTC’s consistent prior position that virtual currency is a ‘service, right or interest.’”
The CFTC has opposed the request to file a reply, arguing that the My Big Coin Pay defendants’ motion to dismiss is “doomed” and they should not be afforded a “do over.”
The case is currently set for a hearing on the afternoon of June 14, 2018.
If the court sides with the My Big Coin Pay defendants, it will be a huge blow to the CFTC, who has been at the forefront of regulating fraud in connection with virtual currencies. The CFTC currently takes the position that, in addition to matters involving futures on virtual currencies, it has jurisdiction over matters involving fraud and manipulation of virtual currencies, because they are commodities in interstate commerce. If the CFTC does not have jurisdiction, who does? State regulators? Could virtual currency creators face competing actions from 50 different states for the same conduct at the same time?
On the other hand, a decision in favor of the CFTC will provide some small measure of clarity in the otherwise murky regulatory landscape for virtual currencies, at least until it becomes more clear which virtual currencies are not actually securities.