On March 6, 2018, in a fraud proceeding involving a virtual currency product, a New York federal court held that virtual currencies can be regulated by the Commodity Futures Trading Commission (CFTC) as commodities. Commodity Futures Trading Commission v. McDonnell (E.D.N.Y. Mar. 6, 2018).[1] This ruling marks the first federal judicial endorsement of the CFTC’s position that it had such jurisdiction over virtual currencies, which the CFTC took in its 2015 order in the Coinflip proceeding.[2] As such, this ruling represents a major step in defining the regulatory landscape in the United States for virtual currencies (also known as cryptocurrencies), of which over 1500 exist, the most well-known being Bitcoin. However, the ruling does not preclude concurrent regulation of virtual currencies by other governmental bodies, a number of which have been devoting attention to this area.

The alleged fraud challenged by the CFTC

The McDonnell case began in January 2018 when the CFTC commenced proceedings against Patrick McDonnell and his company CabbageTech Corp., which did business under the name “Coin Drop Markets.” The CFTC alleged that they offered fraudulent trading and investment services related to virtual currency. According to the CFTC, customers from the United States and abroad paid the defendants for membership in virtual currency trading groups, with the defendants purporting to provide exit prices and profits of up to 300 per cent per week through day trading. However, according to the CFTC, after receiving membership payments and virtual currency investments from their customers, the defendants deleted their social media accounts and websites, ceased communicating with the customers, provided minimal, if any, virtual currency trading advice, and never achieved the promised return on investment. When customers asked for a return of their membership fees or virtual currency investments, the defendants refused and misappropriated the funds.

Under these facts, the court upheld the CFTC’s request for the issuance of a preliminary injunction against the defendants barring them from engaging in any fraudulent practices and trading currencies for themselves or others. The court additionally ordered the defendants to preserve and produce documents and to account for all transfers or payments of funds. But more notably, the court provided a detailed analysis of why regulating virtual currencies that were involved in alleged frauds of this kind fell within the CFTC’s authority to regulate commodities under the Commodity Exchange Act (CEA).[3]

Definition of a “commodity”

The court acknowledged at the start of its ruling that virtual currencies “have some characteristics of government paper currency, commodities, and securities.” It explained that the “CFTC, and other agencies, claim concurrent regulatory power over virtual currency in certain settings,” yet at the same time “concede their jurisdiction is incomplete,” noting that “Congress has yet to authorize a system to regulate virtual currency.” Thus, the court observed, the “CFTC is one of the federal administrative bodies currently exercising partial supervision of virtual currencies,” along with the Department of Justice (DOJ), the Securities and Exchange Commission (SEC), the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS), private exchanges and the states.

The CFTC’s power over virtual currencies, said the court, derives from its “[e]xclusive jurisdiction over ‘accounts, agreements and transactions involving swaps or contracts of sale of a commodity for future delivery’” under the CEA, 7 U.S.C. § 2. The court noted commentators who had offered various rationales for why virtual currencies should be viewed as “commodities”: “based on common usage,” “because virtual currencies provide a ‘store of value,’”; and “because they serve as a type of monetary exchange.”

In reaching its conclusion, the court surveyed the development of online marketplaces for trading and investing in virtual currencies and noted how values had risen and fallen, often dramatically over short periods. The court also observed that “[l]egitimization and regulation of virtual currencies has followed from the CFTC’s allowance of futures trading on certified exchanges.”

Looking at the CEA’s definition of a “commodity,”[4] the court noted that it covered not just various agricultural articles but also “all other goods and articles and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.” The statute’s reference to “services, rights and interests” encompassed even “intangible commodities” such as “futures and derivatives.” Thus, “[w]here a futures market exists for a good, service, right, or interest, it may be regulated by CFTC, as a commodity, without regard to whether the dispute involves futures contracts.” Given the CEA’s anti-fraud provisions and the regulations promulgated thereunder,[5] the CFTC’s enforcement powers extend “to fraud related to spot markets underlying the (already regulated) derivative markets.”

Accordingly, the court held that “[v]irtual currencies can be regulated by CFTC as a commodity,” because they “are ‘goods’ exchanged in a market for a uniform quality and value.” They thus “fall well-within the common definition of ‘commodity’ as well as the CEA’s definition of ‘commodities.’”


While acknowledging that the CFTC has “exclusive jurisdiction over transactions conducted on futures markets,” the court did not go so far as to hold that the CFTC’s authority with regard to the entire range of issues as to virtual currencies was exclusive. “Federal agencies may have concurrent or overlapping jurisdiction over a particular issue or area.” The court noted that the “SEC, IRS, DOJ, Treasury Department, and state agencies have increased their regulatory action in the field of virtual currencies without displacing CFTC’s concurrent authority.”

Of particular note, the court stated 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,” pointing to recent highly-publicized comments by SEC Chairman Jay Clayton that “some products that are labeled cryptocurrencies have characteristics that make them securities,” in which case “[t]he offer, sale and trading of such products must be carried out in compliance with securities law.”[6]

In the situation presented in McDonnell, the court held that “CFTC has jurisdictional authority to bring suit against defendants utilizing a scheme to defraud investors through a ‘contract [for] sale of [a] commodity in interstate commerce’” (citing 7 U.S.C. § 9(1)). The court held this authority was not limited to the CFTC’s traditional focus on futures contracts but could also encompass “spot trade commodity fraud” pursuant given “statutory and regulatory guidelines.” Because in the case at hand, the “CFTC has made a prima facie showing that the defendants committed fraud by misappropriation of investors’ funds and misrepresentation of trading advice and future profits promised to customers” with respect to this virtual currency commodity, the court issued the CFTC the requested relief.


McDonnell is of course just one ruling, issued by a trial-level court and not yet tested on appeal. Nevertheless, it is an important stepping-stone in defining the regulatory landscape that will govern activity in the virtual currency space. Among the key takeaways from McDonnell are the following points:

  • The CFTC can assert regulatory jurisdiction over virtual currencies as “commodities.”
  • This does not necessarily mean that the CFTC in practice will apply to or enforce upon virtual currencies all the same rules that it now applies to other “commodities,” such as classic physical agricultural commodities.
  • However, McDonnell shows that the CFTC will apply existing anti-fraud rules in regard to virtual currencies, at least in the face of fairly brazen fraudulent schemes that border upon outright theft. How the CFTC will act in cases presenting less extreme facts remains to be seen.
  • With McDonnell now having judicially endorsed the exercise of CFTC jurisdiction over virtual currencies, it remains to be seen whether the CFTC will seek to promulgate new rules specific to virtual currencies and the particular issues they pose.
  • Other federal agencies are not precluded from exercising their own regulatory jurisdiction over virtual currencies notwithstanding the CFTC’s authority, such as the SEC if it is determined that a particular virtual currency qualifies as a “security.”
  • No guidance is yet provided about how to resolve possible future conflicts between regulations or enforcement activity of the CFTC and other federal or state authorities, and it remains to be seen how courts will deal with such conflicts should they arise.


[1]     No. 1:18-cv-00361-JBW-RLM, Dkt. No. 29 (E.D.N.Y. Mar. 6, 2018).

[2]     In the Matter of: Coinflip, Inc., CFTC Dkt. No. 15-29 (Sept. 17, 2015).

[3]     7 U.S.C. § 1 et seq.

[4]     7 U.S.C. § 1a(9).

[5]     7 U.S.C. § 9(1); 17 C.F.R. § 180.1.

[6]     Jay Clayton & J. Christopher Giancarlo, Regulators are Looking at Cryptocurrency,Wall Street Journal, Jan. 24, 2018.