It’s a myth, often repeated, that a new widget is so advanced that laws don’t or shouldn’t apply to it. Virtual currencies like bitcoin are the latest “there’s no law!” echo chamber.[1] Coming as no surprise to lawyers who watch the space, there actually is, and case-law is starting to flow from judges presented with cases that address it.

A recent addition to virtual currency case-law came down earlier this week from the legendary Judge Jack Weinstein of the Eastern District of New York. Judge Weinstein was born in 1921, served in World War II, and was appointed to the bench by President Johnson in 1967. Despite (or more likely because of) his long tenure and senior status, he had little problem applying established legal principles to a case involving jurisdiction of the Commodity Futures Trading Commission (“CFTC”) over certain spot market virtual currency transactions.

In CFTC v. Patrick K. McDonnell, 2018 U.S. Dist. LEXIS 36854 [link is to opinion on the CFTC website], CFTC sued the defendants, alleging that they “operated a deceptive and fraudulent virtual currency scheme” and “simply misappropriated customer funds.” CFTC sought a preliminary injunction, damages and restitution. The Court began its opinion by describing the two questions presented as follows: “(1) whether virtual currency may be regulated by the CFTC as a commodity; and (2) whether the amendments to the CEA under the Dodd-Frank Act permit the CFTC to exercise its jurisdiction over fraud that does not directly involve the sale of futures or derivative contracts.” It answered both questions “yes” and granted the request for injunctive relief.

The Court reasoned that virtual currency like bitcoin falls within the definition of commodity set forth in the Commodities Exchange Act, following agency guidance on the subject as well as the statute’s definition of “commodity” which, following a long list of agricultural commodities includes “all other goods and articles … and all services, rights and interests … are presently or in the future dealt with.” The Court concluded that “[v]irtual currencies can be regulated by CFTC as a commodity. Virtual currencies are "goods" exchanged in a market for a uniform quality and value. (Id. at *30)

While CFTC jurisdiction is typically applied to futures contracts, the Court also noted that “The CFTC has recently expanded its enforcement to fraud related to spot markets underlying the (already regulated) derivative markets.” (Id. at * 28) (citing cases). “Where 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.” (Id. at * 30). In this connection, the Court noted that other federal agencies could have jurisdiction over the virtual currencies – this in and of itself is not a limitation on CFTC’s authority. Thus, injunction entered and fairly onerous order entered.

The most notable part of this opinion – at least to me – is how matter of fact and lawyerly it is. It doesn’t matter the technology is new. It shouldn't be a surprise -- the Court analyzed the facts, applied established law, and reached a conclusion that was probably not a shock to lawyers who follow the space. I expect more to follow. You should too.

* P.S. -- These are my opinions only and are not authorized or made on behalf of any past, present or future employer, client or Palley. I may change my mind. "I contain multitudes", as you know from prior disclaimers. And for heaven's sake this isn't legal advice. It's a blog post.

[1]. I am reminded a lot of the fuss about drones a couple of years ago. You kept hearing people complaining about regulation or pretending like it didn't exist (it did). The rules in the U.S. were streamlined, true. But it's not like a regulatory process (exemptions) didn't exist. And it's not like you really want drones flying into your front window either. (For my views on this circa 2015, see Drones, Babies and Common Sense) Same thing here. Interesting, one of the crypto futures exchanges wrote an amicus brief supporting extension of CFTC jurisdiction to spot transactions involving fraud or misrepresentation. A functioning futures market apparently requires an honest underlying spot market! Who knew?