CFTC Appeals Monex Opinion Curbing Enforcement, Crypto Authority

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By Lydia Beyoud

The nation’s commodities swaps and derivatives regulator is appealing a federal judge’s decision that could change the way it brings enforcement actions and seeks to regulate the virtual currency market.

The Commodity Futures Trading Commission wants a panel of judges to hear a case it brought against Monex, a precious metals dealer. The agency asked the court to satisfy a few procedural steps in a May 25 notice of its plan to appeal.

The judge who heard the case has indicated the court will proceed with the request. Judge James Selna helped fast-track the process by filing a precertification for appeal on May 15.

Selna reasoned the speed was warranted since his May 1 opinion dismissing the CFTC’s complaint “involves a controlling question of law as to which there is substantial ground for difference of opinion, and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.”

The agency filed a complaint against Monex in September 2017, alleging it committed fraud through off-exchange leveraged gold transactions, resulting in approximately 12,000 accounts collectively losing more than $290 million during a near six-year period. The CFTC also said the company failed to deliver control of gold to purchasers within 28 days of a leveraged transaction, a violation of the Commodity Exchange Act.

But the CFTC now finds itself in the hot seat, fending off a challenge to its broader regulatory authority thanks to a May 1 decision in the U.S. District Court for the Central District of California.

Crypto Authority at Stake

The court determined the legislative history behind the 2010 Dodd-Frank Act only allowed the CFTC to bring enforcement cases involving both fraud and market manipulation, rather than when only one is present. Selna also said the CFTC’s 28-day rule made no sense if it requires a dealer to hand over control of a commodity that hasn’t been fully paid for by the buyer.

That reasoning has important implications for the CFTC’s work in determining when virtual currency trading platforms must register with the commission and abide by stricter regulatory oversight for futures products.

Generally, dealers that can deliver or turn over control of a commodity to a buyer within 28 days of a “spot market” transaction don’t have to register as a commodities dealers. If the 28-day rule were applied to the virtual currencies market, it could increase the number of cryptocurrency trading platforms and dealers required to register and be subject to greater CFTC oversight for leveraged or margined cryptocurrency transactions.

The CFTC is still finalizing guidance on interpretation of the “actual delivery” rule for the virtual currency context.

The case is Commodity Futures Trading Commission v. Monex Credit Co. , C.D. Cal., No. 8:17-cv-01868-JVS-DFM, notice filed 5/25/18 .

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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