Digital and virtual currencies continue to be a growing trend in the financial industry. Investors are demonstrating increased interest and trading activity, and, more and more financial advisers are considering inclusion of cryptocurrencies in investment portfolios.
Existing as digital representations of currency that can be exchanged for goods and services, their lack of clearly defined status as securities or commodities (or something else) has placed them in unclear waters without a regulatory body holding oversight authority. The regulators have arrived a bit late to the digital currency and are making efforts to determine how to regulate these virtual, non-traditional products.
This increased interest and demand, accompanied by uncertainty concerning the regulatory status of the cryptocurrencies, has created an opportunity for dishonest individuals to take advantage of this new and still poorly regulated market.
Are Cryptocurrencies Considered to be Securities?
The Securities and Exchange Commission (SEC) has maintained that many virtual currencies actually meet the definition of securities or commodities and that they should be subject to the registration and other requirements of federal securities regulations in order to be offered for sale.
Both the SEC and Commodity Futures Trading Commission (CFTC) have sought to determine which virtual currencies meet the standards of a "security" or "commodity" in order to better regulate the market and prevent fraudulent trading activities.
Court Rules Digital Currency is Commodity, CFTC Has Regulatory Power to Prosecute
In a September 26, 2018, ruling, the U.S. District Court of Massachusetts ruled that the CFTC has the power to regulate and prosecute fraudulent activities involving virtual currencies that meet the definition of securities, including the defendants of the My Big Coin case.
In this case, the CFTC has alleged that My Big Coin solicited retail customers using repeated false claims related to the digital currency's:
- Trade status
- Financial backing
In the case, the court denied the motion to dismiss filed by the defendants, which claimed that the CFTC's anti-fraud authority extended only to fraudulent market manipulation. The court ruled that My Big Coin was a commodity based, in part, on the "broad language in the statute" "explicitly prohibit[s] fraud even in the absence of market manipulation."
The CFTC is seeking civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws, as charged.
Cryptocurrency Trading - What the Ruling Means
This ruling clearly states that the My Big Coin product is a commodity, and that the CFTC has authority to prosecute this, and thereby other, fraud in virtual currencies as it can with other commodities.
"This ruling, like the one in McDonnell from Judge Weinstein in the Eastern District of New York, recognizes the broad definition of commodity under the Commodities Exchange Act, and also that the CFTC has the power to prosecute fraud with respect to commodities, including virtual currencies. We will continue to police these markets in close coordination with our sister agencies," said James McDonald, CFTC Director of Enforcement.
Suffice it to say that virtual currencies and the (sometimes questionable) trading activity their popularity and potential profitability have generated are attracting the attention of regulatory bodies.
Greater Attention to Due Diligence Necessary
Prior to recommending that clients invest in cryptocurrencies, due diligence must be performed to assess the status of the virtual currency as a security or commodity and the regulations that would apply (in addition to the standard due diligence about the quality of the investment, of course).
Failure to perform such due diligence could result in significant financial loss, regulatory scrutiny, an enforcement action against the adviser, or all of the above, as the regulatory bodies continue their attempts to better define how virtual currencies fit into the regulatory landscape.
For more information on the trading of virtual currencies, or any other related legal questions, contact Jacko Law Group, PC. Let our experience work for you.
Robert D. Conca is a Partner at Jacko Law Group, PC. His practice includes representation of investment advisers, broker-dealers, private funds, and non-financial industry companies, and their personnel, in a variety of ...
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