Crypto Currency can be a Commodity
A federal judge in Massachusetts agreed with the Commodity Futures Trading Commission’s view that virtual currencies are commodities under the Commodity Exchange Act and subject to federal regulation. See CFTC v. My Big Coin Pay, Inc., (D. Mass. Sept. 26, 2018). The CFTC sued a virtual currency company and several affiliated companies and individuals alleging fraud and misappropriation in the sale of the virtual currency “My Big Coin.” The CFTC claims that defendants perpetrated the fraud by falsely representing to purchasers that My Big Coin was “backed by gold,” could be used anywhere Mastercard was accepted, and was being “actively traded” on several currency exchanges.
My Big Coin Pay is the second federal court decision to embrace that virtual currencies are commodities under federal law. In CFTC v. McDonnell, (E.D.N.Y. Mar. 6, 2018), the court found that the term “commodity” encompasses virtual currency “both in economic function and in the language of the statute” because virtual currencies are “‘goods’ exchanged in a market for a uniform quality and value.”
Unregistered national securities exchange
The SEC brought its first enforcement action against a cryptocurrency trading platform for operating as an unregistered national securities exchange. EtherDelta is an online platform for secondary market trading of ERC20 tokens used by Etherium based crypto. Over an 18-month period, EtherDelta’s users executed more than 3.6 million orders for ERC20 tokens, including tokens that are securities under the federal securities laws. Almost all of the orders placed through EtherDelta’s platform were traded after the Commission issued its 2017 DAO Report, which concluded that certain digital assets, such as DAO tokens, were securities and that platforms that offered trading of these digital asset securities would be subject to the SEC’s requirement that exchanges register or operate pursuant to an exemption. EtherDelta offered trading of various digital asset securities and failed to register as an exchange or operate pursuant to an exemption.
The Environment
If you’re an environmentalist you also need to think about the energy of cryptocurrency mining. The amount of energy required to “mine” one dollar’s worth of bitcoin is more than twice that required to mine the same value of copper, gold or platinum.
You Can’t Hide Overseas
The Tezos blockchain project established a Swiss non-profit stiftung to oversee the ICO and control the proceeds. No surprise that the ICO was bad for those who bought and they a class action. The court found the tokes to be securities. The meant the sale was an unregistered security transaction. The only question was whether the ICO and its sponsors were subject to US securities laws. The court listed several factors that contributed to its determination that the sale of Tezos tokens had occurred in the United States, including that:
- US investors bought Tezos tokens
- a website that sold the tokens was hosted in the US and run by a person located in the US
- marketing efforts targeted US residents
- payments made in Ether for the Tezos tokens were validated by a network of Ethereum nodes clustered more densely in the US than in any other country.
Unregistered Broker-Dealer
The Securities and Exchange Commission imposed sanctions against TokenLot LLC, an “ICO Superstore,” for its sales of digital tokens to the general public through a website. The SEC found that TokenLot acted as unregistered broker-dealers in violation of Section 15(a) of the Securities Exchange Act of 1934 and engaged in unregistered securities offerings in violation of Section 5 of the Securities Act of 1933.
Summary
It’s clear the SEC and CFTC have some easy targets in ICOs and their sponsors. I expect there are many more cases in the pipelines.
Sources:
- A Second Federal Court Decides Virtual Currencies are Commodities Subject to Federal Regulation
- SEC Charges “ICO Superstore” as Unregistered Broker-Dealer by John J. Sikora, Jr., Stephen Wink, Douglas K. Yatter, and Naim Culhaci
- Tokens and the Extraterritorial Reach of US Securities Laws by David Felsenthal, Steven Gatti, and Jesse Overall, Clifford Chance US LLP
- SEC Charges EtherDelta Founder With Operating an Unregistered Exchange
- Energy cost of ‘mining’ bitcoin more than twice that of copper or gold by Alex Hern in the Guardian
