Just like the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) is actively policing the virtual currency market.  On January 24, 2018, the CFTC announced an enforcement action against two individuals and a company, My Big Coin Pay, Inc., for fraudulently offering the sale of a “fully functioning” virtual currency. Press Release, CFTC Charges Randall Crater, Mark Gillespie, and My Big Coin Pay, Inc. with Fraud and Misappropriation in Ongoing Virtual Currency Scam (Jan. 24, 2018), http://www.cftc.gov/PressRoom/PressReleases/pr7678-18In filing the action, the CFTC also sought and obtained from the U.S. District Court for the District of Massachusetts a restraining order and an asset freeze of the defendants and relief defendants who received customer funds without allegedly providing any legitimate services.  What is important about this case is that it proves that the government, through various agencies, is dedicating significant resources to investigate and ferret out fraud in the virtual currency arena.  While typically this type of action (e.g., soliciting investors to invest; misappropriation of funds; false and misleading statements about the value, usage and trading status) would be the province of the SEC, the CFTC here is flexing its regulatory muscle and aggressively filing charges.  This appears to be another recent action by the CFTC to assert jurisdiction over a virtual currency based on the fact that the CFTC deems virtual currencies to be commodities.  See Andrew P. Cross, CFTC Files Charges in Bitcoin Ponzi Scheme, Perkins Coie (Sept. 21, 2017), https://www.derivativesandreporeport.com/2017/09/cftc-files-charges-in-bitcoin-ponzi-scheme/.  Particularly in this case, there are no allegations that a swap or forward contract relating to a commodity was involved.

Section 6(c)(1) of the Commodity Exchange Act and Regulation 180.1(a) provide the CFTC with anti-fraud authority in connection with “any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery.”  It is noteworthy that the CFTC invoked jurisdiction here without alleging a swap or future delivery.  Rather, the CFTC relied on its prior pronouncement that virtual currencies are deemed to be commodities to assert jurisdiction.

Alleged Fraudulent Conduct
According to the CFTC’s complaint, the defendants fraudulently solicited potential and existing My Big Coin (MBC) customers throughout the United States by making false and misleading claims and omissions about MBC’s value, usage, and trade status and indicating that MBC was backed by gold.  In this regard, the MBC website conveyed to potential and actual MBC customers numerous solicitation materials, MBC trade data, and other materials (1) misrepresenting that MBC was actively being traded on several currency exchanges, including the MBC Exchange website, when in fact it was not; (2) misrepresenting in reports the daily trading price, when in fact no price existed because MBC was not trading; (3) misrepresenting that MBC was backed by gold, when in fact it was not; and (4) misrepresenting that MBC had partnered with MasterCard, with the promise that MBC could be used anywhere MasterCard was accepted, when in fact no such partnership existed and MBC could not be used anywhere MasterCard was accepted.  In reality, according to the CFTC, the supposed trading results were illusory, and any payouts to customers were derived from funds fraudulently obtained from other customers in the manner of a Ponzi scheme.

The CFTC also alleged that as customers began to raise questions about their MBC accounts, the defendants attempted to conceal their fraud by issuing additional coins to customers and falsely representing that they had secured a deal with another exchange to trade MBC.  In addition, the defendants allegedly encouraged customers to refrain from redeeming their MBC holdings until MBC was active on this “new” exchange.  In total, the CFTC alleged that the defendants misappropriated virtually all of the approximately $6 million that they solicited from MBC customers and that they used the funds to purchase a home, fine art, jewelry, travel and entertainment.

The Significance of This Enforcement Matter
The take-away from this enforcement action is simple—more federal agencies are investigating and prosecuting fraudulent conduct as its relates to virtual currencies, and these agencies will seek to exercise emergency relief such as restraining orders and asset freezes.  Stay tuned, as I suspect that there are many more cases in the pipeline.

The complaint filed by the CFTC is available here.