CFTC Can Regulate Cryptocurrencies as Commodities, Court Rules

By Lydia Beyoud and Jennifer Bennett

A federal court has confirmed that the CFTC has authority to regulate Bitcoin and other cryptocurrencies as commodities.

“Until Congress clarifies the matter, the CFTC has concurrent authority, along with other state and federal administrative agencies, and civil and criminal courts, over dealings in virtual currency,” a judge for the U.S. District Court for the Eastern District of New York said in a preliminary injunction order issued late March 6.

Senior District Judge Jack B. Weinstein’s decision allows the Commodity Futures Trading Commission to proceed with a fraud enforcement case against CabbageTech Corp., doing business as Coin Drop Markets, and its CEO, Patrick McDonnell.

The CFTC is seeking injunctive relief and monetary penalties against Coin Drop Markets and McDonnell for allegedly misappropriating investor money through a cryptocurrency trading scam, according to the complaint.

Regulators are Watching

“This is not a decision where the result is surprising,” Jai Massari, a partner at Davis Polk & Wardwell LLP’s Washington office whose practice focuses on trading and markets, told Bloomberg Law.

“I think there’s a strong desire as a policy matter to find that somebody has authority” over cryptocurrency markets, former Securities and Exchange Commissioner Annette Nazareth told Bloomberg Law. Nazareth now heads Davis Polk & Wardwell’s Washington office and leads its trading and markets practice, said.

The CFTC has regarded cryptocurrencies as commodities since 2015, when Chairman Timothy G. Massad, a Democrat, led the commission. Current CFTC Chairman J. Christopher Giancarlo, a Republican, has continued to pursue commodities enforcement actions against cryptocurrency firms.

The CFTC has limited authority to regulate spot markets, where commodities are traded for immediate rather than future delivery. The commission can, however, undertake anti-fraud and anti-manipulation enforcement actions, Giancarlo told the Senate Banking Committee Feb. 6.

The CFTC has an internal cryptocurrency enforcement task force that works closely with the Securities and Exchange Commission, Giancarlo told the committee. The McDonnell case is one of several the CFTC is pursuing involving alleged cryptocurrency fraud.

SEC Chairman Jay Clayton has previously said that many cryptocurrencies function like securities, and should be regulated as such. Weinstein’s opinion acknowledged cryptocurrencies share characteristics with both commodities and securities, but only ruled on commodities.

Many cryptocurrency firms might not have been paying much attention to regulators, Massari said. This case is evidence regulators “are really watching this area carefully, and there are regulations that apply,” she added.

McDonnell declined to comment while the case is ongoing. He is representing himself in court.

The case is CFTC v. McDonnell , E.D.N.Y., 18-CV-361, preliminary injunction order released 3/6/18 .

To contact the reporters on this story: Lydia Beyoud in Washington at; Jennifer Bennett in Washington at

To contact the editor responsible for this story: Michael Ferullo at

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