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  • District Court recognizes CFTC authority to regulate virtual currency as commodities


    On March 6, the U.S. District Court for the Eastern District of New York granted the CFTC’s request for preliminary injunction against defendants alleged to have misappropriated investor money through a cryptocurrency trading scam, holding that the CFTC has the authority to regulate virtual currency as commodities. The decision additionally defined virtual currency as a “commodity” within the meaning of the Commodity Exchange Act (CEA) and gave the CFTC jurisdiction to pursue fraudulent activities involving virtual currency even if the fraud does not directly involve the sale of futures or derivative contracts. However, the court noted that the “jurisdictional authority of CFTC to regulate virtual currencies as commodities does not preclude other agencies from exercising their regulatory power when virtual currencies function differently than derivative commodities.” Under the terms of the order, the defendants are restrained and enjoined until further order of the court from participating in fraudulent behavior related to the swap or sale of any commodity, and must, among other things, provide the CFTC with access to business records and a written account of financial documents.

    Find continuing InfoBytes coverage on virtual currency oversight here.

    Fintech Virtual Currency Courts CFTC Cryptocurrency Commodity Exchange Act

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  • CFTC offers large reward to “pump-and-dump” scheme whistleblowers


    On February 15, the Commodity Futures Trading Commission (CFTC) issued a Consumer Protection Advisory on virtual currency “pump-and-dump” schemes, which offers eligible whistleblowers between 10 and 30 percent of enforcement actions of $1 million or more, which result from the shared information. The notice cautions consumers against falling for the fraudulent “pump-and-dump” schemes, which capitalize on consumers’ fear of missing the potentially lucrative—yet volatile—cryptocurrency market. The advisory warns consumers that many of the perpetrators of these schemes use social media to promote false news reports and create fake urgency for consumers to buy the cryptocurrency immediately. Then, after the price reaches a certain level, the schemers sell their virtual currency and the price begins to fall.

    Fintech Virtual Currency CFTC Bitcoin Cryptocurrency Whistleblower Enforcement

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  • Market regulators discuss cryptocurrency oversight gaps during Senate Banking Committee hearing


    On February 6, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled, “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission” to discuss the need for unified measures to close regulatory gaps in the cryptocurrency space. Committee Chairman Mike Crapo, R-Idaho, opened the hearing by briefly discussing the rise in interest in virtual currencies among Americans, as well as investor education and enforcement efforts undertaken by the SEC and the CFTC. Crapo commented that he was interested in learning how regulators plan to safeguard investors. Sen. Sherrod Brown (D-Ohio), ranking member of the Committee, spoke about the importance of pursuing “the unique enforcement of regulatory demands posed by virtual currencies.”

    SEC Chairman Jay Clayton commented in prepared remarks that the SEC does not want to “undermine the fostering of innovation through our capital markets,” but cautioned that there are significant risks for investors when they participate in an entity’s initial coin offering (a method used to raise capital through decentralized autonomous organizations or other forms of distributed ledgers or blockchain technology) or buy and sell cryptocurrency with firms that are not compliant with securities laws. Speaking before the Committee, Clayton stated that the SEC has some oversight power in this space but supported collaborating with Congress and states on new regulations for cryptocurrency firms. “We should all come together, the federal banking regulators, CFTC, the SEC—there are states involved as well—and have a coordinated plan for dealing with the virtual currency trading market,” Clayton stressed.

    In prepared remarks, CFTC Chairman Chris Giancarlo discussed different approaches to regulating distributed ledger technologies and virtual currencies. “‘Do no harm’ was unquestionably the right approach to development of the internet. Similarly, I believe that ‘do no harm’ is the right overarching approach for distributed ledger technology,” Giancarlo said. “Virtual currencies, however, likely require more attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space.” 

    Giancarlo referenced a joint op-ed in which the two chairmen discussed whether the “historic approach to the regulation of currency transactions is appropriate for the cryptocurrency markets,” and offered support for “policy efforts to revisit these frameworks and ensure they are effective and efficient for the digital era.” The chairmen also agreed that the lack of a clear definition for what cryptocurrencies are has contributed to regulatory challenges, but stressed that their agencies would continue to bring enforcement actions against fraudsters. Both the SEC and CFTC have joined a virtual currency working group formed by the Treasury Department—which also includes the Federal Reserve and the Financial Crimes Enforcement Network—to discuss cryptocurrency jurisdiction among the agencies and understand where the gaps exist.

    See here for additional InfoBytes coverage on initial coin offerings and virtual currency.

    Fintech Virtual Currency Cryptocurrency Distributed Ledger SEC CFTC Senate Banking Committee

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  • SEC and CFTC issue joint statement on virtual currency enforcement actions; CFTC files lawsuits alleging cryptocurrency fraud


    On January 19, the SEC and the Commodity Futures Trading Commission (CFTC) issued a joint statement to reiterate the agencies’ positions on virtual currency enforcement and stress that they “will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws.” As previously discussed in InfoBytes last year (see here and here), the SEC determined that federal securities laws apply to anyone who offers and sells securities in the United States, regardless of the manner of distribution or whether dollars or virtual currencies are used to purchase the securities, while the CFTC announced that virtual currencies are commodities. Additionally, both agencies filed enforcement actions in 2017 against firms based upon fraud allegations (coverage available here and here).

    Separately, on January 18, the CFTC filed lawsuits in the U.S. District Court for the Eastern District of New York against two individuals and their companies, alleging commodities law violations and fraud in the cryptocurrency market. In the first complaint, the CFTC alleged that a UK-registered company and its owner solicited cryptocurrency investments from members of the public for a commodity pool, but misrepresented the company’s trading expertise, misappropriated over $1 million of the pool’s funds, and failed to engage in the proposed investments with the pooled funds. In the second complaint, the CFTC alleged that a New York-based company and its owner operated a deceptive and fraudulent scheme in which they solicited cryptocurrency transfers in exchange for virtual currency investment advice and trading guidance, but never actually provided such advice. The CFTC further claimed the company concealed its scheme after collecting customer funds by removing its internet presence and ceasing communications with those customers. The suits seek, among other things, disgorgement of profits, civil monetary penalties, restitution, and a ban on commodities trading for the defendants.

    Fintech Virtual Currency CFTC SEC Enforcement Cryptocurrency

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  • Chair Giancarlo outlines CFTC approach to virtual currency regulation


    On January 4, the Chair of the CFTC, J. Christopher Giancarlo, issued a statement emphasizing the CFTC’s commitment to effectively regulating virtual currency and reiterated the CFTC’s view that virtual currency is a “commodity,” as defined by the Commodity Exchange Act (CEA), and thus is subject to CFTC regulation. Giancarlo noted that it would be irresponsible to ignore virtual currency and that the CFTC is following steps to effectively and responsibly regulate the risks, specifically, “consumer education, asserting CFTC authority, surveilling trading in derivative and spot markets, prosecuting fraud, abuse, manipulation and false solicitation and active coordination with fellow regulators.” Giancarlo’s statement also noted an upcoming meeting of the CFTC Technology Advisory Committee to discuss virtual currencies on January 23.

    The CFTC also published a backgrounder on the oversight of the virtual currency futures market, which describes the “heightened review” for the self-certification process as applied to virtual currency futures products, and explains the extent to which the CFTC “not only has clear legal authority, but now also will have the means to police certain underlying spot markets for fraud and manipulation.”

    Fintech Virtual Currency CFTC Bitcoin

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  • CFTC Issues Proposed Interpretation of “Actual Delivery” in Virtual Currency Transactions; Launches Virtual Currency Resource Page


    On December 15, the Commodity Futures Trading Commission (CFTC) announced a proposed interpretation concerning its authority over transactions involving virtual currency, which includes its view regarding the term “actual delivery” in the context of retail virtual currency transactions. According to the proposed interpretation, the CFTC claims that it has “explicit oversight authority” over “retail commodity transactions” under Section 2(c)(2)(D) of the Commodity Exchange Act. Applying a broad definition of the term virtual currency, the CFTC believes that these type of currencies are commodities, which means that certain transactions in virtual currencies are subject to CFTC oversight.

    The proposed interpretation sets forth two primary factors that market participants must demonstrate to prove “actual delivery” of virtual currency in connection with retail commodity transactions:

    • a customer has the ability to “(i) take possession and control of the entire quantity of the commodity, whether it was purchased on margin, or using leverage, or any other financing arrangement, and (ii) use it freely in commerce (both within and away from any particular platform) no later than 28 days from the date of the transaction”; and
    • “the offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with the offeror or counterparty seller on a similar basis) does not retain any interest in or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction.”

    Comments on the proposed regulation must be received on or before March 20, 2018.

    In October, the CFTC’s LabCFTC released “A CFTC Primer on Virtual Currencies,” which discusses potential use-cases for virtual currencies, outlines the agency’s role and oversight of virtual currencies, and highlights the risks associated with virtual currencies. The CFTC also launched its own webpage with virtual currency resources and a customer advisory warning of the risks of virtual currency trading.

    Fintech Virtual Currency CFTC Federal Register Bitcoin

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  • CFTC Issues Primer on Virtual Currencies, Claims Certain Virtual Tokens Fall Under Its Oversight


    On October 17, the U.S. Commodity Futures Trading Commission (CFTC) announced the release of “A CFTC Primer on Virtual Currencies” (Primer) issued by its LabCFTC division. As previously discussed in Infobytes, the LabCFTC initiative rolled out in May of this year to engage innovators in the financial technology industry to promote responsible fintech innovation within regulated CFTC markets. In this Primer—a first in a series—the CFTC discusses potential use-cases for virtual currencies and outlines the agency’s role and oversight of virtual currencies. The Primer also highlights the risks associated with virtual currencies, such as (i) the susceptibility of “digital wallets” to cybersecurity hacks; (ii) inadequate safeguards and other customer protection related systems on virtual currency exchanges; and (iii) the susceptibility of virtual currencies to Ponzi schemes and other types of frauds.

    The CFTC noted that there’s no inconsistency between the SEC’s analysis that Initial Coin Offerings or Token Sales may be subject to federal securities law (see previous InfoBytes coverage here) and CFTC’s determination that virtual currencies are commodities and virtual tokens “may be commodities or derivatives contracts, depending on the particular facts and circumstances.” Last month, as discussed in InfoBytes, the CFTC also filed its first-ever antifraud enforcement action for activities involving Bitcoin investment solicitations.

    Securities Fintech Agency Rule-Making & Guidance CFTC Digital Commerce Initial Coin Offerings Virtual Currency Bitcoin SEC

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  • CFTC Files Anti-Fraud Enforcement Action Against New York-Based Corporation Concerning Bitcoin Investments


    On September 21, the U.S. Commodity Futures Trading Commission (CFTC) filed a complaint in the U.S. District Court for the Southern District of New York against a New York-based corporation and its CEO (defendants) for allegedly engaging in fraudulent acts and practices in violation of the Commodity Exchange Act and CFTC Regulations by issuing false account statements in connection with Bitcoin investment solicitations. According to the complaint, the “Bitcoin Ponzi scheme” solicited more than $600,000 from approximately 80 customers to be placed in a pooled fund, executed by the defendants’ computer program called “Jigsaw,” which traded the virtual currency. The CFTC alleges that defendants’ strategy was fake and the “purported performance reports” were false in that they created the appearance of positive Bitcoin trading increases, but the gains were “illusory.” The CFTC further asserts that the “payouts of supposed profits to [pool participants] in actuality consisted of other customers’ misappropriated funds.” In addition, the CFTC alleges that defendants orchestrated a “fake computer ‘hack’” to conceal the scheme. The suit seeks, among other things, disgorgement of profits, civil monetary penalties, restitution, and a ban on commodities trading for the defendants.

    Courts Bitcoin Litigation Enforcement Virtual Currency Fraud CFTC

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  • Senate Banking Committee Leaders Seek Regulators' Views On Virtual Currencies


    On May 19, the Senate Banking Committee’s chairman and ranking member, Senators Tim Johnson (D-SD) and Mike Crapo (R-ID), sent a letter to the leaders of the Treasury Department, the SEC, the CFTC, the OCC, the FDIC, and the Federal Reserve Board regarding recent developments in the use of virtual currencies and their interaction with the global payment system. The Senators ask the regulators a series of questions related to the role of virtual currencies in the U.S. banking system, payment system, and trading markets, and the current role of federal regulators in developing local, national, and international enforcement policies related to virtual currencies. The Senators also seek the agencies’ expectations on virtual currency firms’ BSA compliance, and ask whether an enhanced regulatory framework for virtual currencies is needed.

    FDIC Federal Reserve OCC SEC CFTC Department of Treasury U.S. Senate Virtual Currency

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