Cryptocurrencies are Commodities, US Federal Judge Rules

News | March 7, 2018 By:

Jack Weinstein, a federal judge for the Eastern District of New York, has ruled that the US Commodity Futures Trading Commission (CFTC) can legally classify and regulate cryptocurrencies as commodities.

On Tuesday, Judge Weinstein agreed that cryptocurrencies should be treated as commodities. He said it was supported by the plain meaning of the word “commodity” and that the CFTC had broad leeway to interpret the federal law regulating commodities.

Weinstein ruled that the CFTC had legitimate legal standing to go forward with a fraud lawsuit against New York resident Patrick McDonnell. Weinstein also entered a preliminary injunction barring McDonnell and Coin Drop Markets from engaging in commodity transactions.

The CFTC originally filed a complaint against McDonnell and his company last month. The complaint alleged that since about January 2017, McDonnell and his company fraudulently offered customers cryptocurrency trading advice. However, the customers never received the advice they paid for. The CFTC also said that McDonnell took down Coin Drop Markets’ website and stopped responding to customers. Coin Drop was also never registered with the agency.

Weinstein declared that the CFTC had found “a reasonable likelihood that without an injunction the defendants will continue to violate the Commodity Exchange Act (CEA).”

The Memorandum and Order containing the ruling states that “The court finds the plaintiff has made a preliminary prima facie showing that the defendants committed fraud by misappropriation of investors’ funds and misrepresentation through false trading advice and promised future profits.”

Ropes & Gray investment management counsel Ed Baer said that while the ruling confirms the CFTC’s prior determination that cryptocurrencies are commodities, recent statements by US Securities and Exchange Commission Chairman Jay Clayton suggested that various types of these cryptocurrencies – especially tokens issued in initial coin offerings (ICO) – may be securities.

“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,” said Baer. “Given that the test used to determine whether an instrument is a security was developed more than 60 years before Satoshi Nakamoto published the paper describing bitcoin, the uncertainty around the regulatory treatment of most cryptocurrencies will remain, despite Judge Weinstein’s ruling.”