We have previously discussed the position taken by the U.S. SEC with respect to cryptocurrencies. But the US Commodity Futures Trading Commission (CFTC) also has a role to play.
On September 17, 2015, the CFTC brought its first cryptocurrency action against an unregistered Bitcoin trading platform. Coinflip, Inc. d/b/a Derivabit (Coinflip) and its chief executive officer Francisco Riordan were charged operating a facility for the trading or processing of commodity options (offering to connect buyers and sellers of Bitcoin option contracts) without complying with the CEA or CFTC Regulations otherwise applicable to swaps. Perhaps the most significant part of the CFTC’s Order was the following unambiguous statement about cryptocurrencies:
Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.
Thus, the CFTC stated clearly that virtual currencies fall under its jurisdiction.
In September 2017, the CFTC announced the filing of a federal civil enforcement action in the U.S. District Court for the Southern District of New York against Defendants Nicholas Gelfman, of Brooklyn, New York, and Gelfman Blueprint, Inc. (GBI), a New York corporation, charging them with fraud, misappropriation, and issuing false account statements in connection with solicited investments in Bitcoin. The complaint alleges that Gelfman and GBI told investors they could make 7 to 9 percent returns every month with the help of their algorithmic trading program, but none of it was true; rather it was a Ponzi scheme in which payouts of supposed profits to GBI Customers in actuality consisted of other customers’ misappropriated funds.
The CFTC’s two latest cases were brought today in the Eastern District of New York. One case is against Dillon Michael Dean of Longmont, Colorado, and his company The Entrepreneurs Headquarters Limited, a UK-registered company. The alleges that defendants, who have never been registered with the CFTC in any capacity, engaged in a fraudulent scheme, through which they solicited at least $1.1 million worth of Bitcoin from more than 600 members of the public. Defendants allegedly promised to convert this Bitcoin into fiat currency to invest on the customers’ behalf in a pooled investment vehicle for trading commodity interests, including trading binary options on an online exchange designated as a contract market by the CFTC. Potential pool participants were solicited to invest with the defendants by false claims of trading expertise and promises of high rates of return. The complaint further alleges that, rather than convert customers’ Bitcoin to fiat currency to invest in binary options contracts, as promised, the defendants misappropriated their customers’ funds, including by using the funds to pay other customers, in the manner of a Ponzi scheme.
The other case is against defendants Patrick K. McDonnell, of Staten Island, New York, and CabbageTech, Corp. d/b/a Coin Drop Markets (CDM). According to the, the defendants engaged in a deceptive and fraudulent virtual currency scheme to induce customers to send money and virtual currencies to CDM, purportedly in exchange for real-time virtual currency trading advice and for virtual currency purchasing and trading on behalf of the customers under McDonnell’s direction; the supposedly expert, real-time virtual currency advice was never provided and the funds were misappropriated.