CFTC can regulate cryptocurrencies as commodities, court rules

A U.S. District Court judge upheld the Commodity Futures Trading Commission's authority to regulate cryptocurrencies as commodities and to pursue fraud cases involving their sale.

U.S. District Judge Jack Weinstein in New York on Tuesday entered a preliminary injunction order against Patrick K. McDonnell and CabbageTech (doing business as Coin Drop Markets), following a Jan. 18 complaint by the CFTC charging them with fraud and misappropriation involving trading of the virtual currencies bitcoin and litecoin. The agency said the actions violated the Commodity Exchange Act.

"Virtual currencies are 'goods' exchanged in a market for a uniform quality and value," which keeps them well within the common definition of a commodity, Mr. Weinstein said in the order.

The case was one of several brought in January by the CFTC and its virtual currency enforcement task force. The CFTC has also issued several customer protection fraud advisories on virtual currency trading.

In addition to questioning the CFTC's authority to regulate cryptocurrencies as commodities, Mr. McDonnell challenged whether amendments to the Commodity Exchange Act under the Dodd-Frank Act allow the CFTC to pursue fraud cases involving something other than futures or derivative contracts. "Both questions are answered in the affirmative," Mr. Weinstein wrote.

Still, said Ed Baer, investment management counsel with law firm Ropes & Gray, "the uncertainty around the regulatory treatment of most cryptocurrencies will remain despite Judge Weinstein's ruling."

Mr. Baer noted recent statements by Securities and Exchange Commission Chairman Jay Clayton suggesting that the SEC may have regulatory jurisdiction over some cryptocurrencies, especially those issued in initial coin offerings.

"The challenge for cryptocurrency exchanges and investors, as well as for regulators such as the SEC and CFTC, will be to determine which of the over 1,000 types of these cryptocurrencies are securities and which ones are not," Mr. Baer said.