0/ A quick summary of today's ruling in the My Big Coin case.
In short, a federal court says *all* digital currencies are commodities & the CFTC has jurisdiction to prosecute fraud & manipulation in crypto. In my view, the ruling is deeply flawed.
Thread.nytimes.com/reuters/2018/0…
In short, a federal court says *all* digital currencies are commodities & the CFTC has jurisdiction to prosecute fraud & manipulation in crypto. In my view, the ruling is deeply flawed.
Thread.nytimes.com/reuters/2018/0…
1/ Background:
According to the CFTC, the defendants sold a crypto called "My Big Coin" by falsely claiming it was backed by gold (it wasn't).
They also pretended it was actively traded on exchanges (nope) & made up arbitrary prices to raise $6 million from defrauded investors.
According to the CFTC, the defendants sold a crypto called "My Big Coin" by falsely claiming it was backed by gold (it wasn't).
They also pretended it was actively traded on exchanges (nope) & made up arbitrary prices to raise $6 million from defrauded investors.
2/ The CFTC filed a lawsuit alleging violations of the anti-fraud & anti-manipulation provisions of the Commodity Exchange Act ("CEA").
The defendants filed a motion to dismiss arguing the CEA doesn't apply because My Big Coin isn't a commodity, so the CFTC has no jurisdiction.
The defendants filed a motion to dismiss arguing the CEA doesn't apply because My Big Coin isn't a commodity, so the CFTC has no jurisdiction.
3/ The court had to decide whether My Big Coin is a commodity or not.
The ruling explains the CEA's definition of a commodity: agricultural products like wheat, soybeans & livestock, plus any other goods & services that are "dealt in" futures contracts. scribd.com/document/38953…
The ruling explains the CEA's definition of a commodity: agricultural products like wheat, soybeans & livestock, plus any other goods & services that are "dealt in" futures contracts. scribd.com/document/38953…
4/ The ruling then explains that bitcoin is dealt in futures contracts, so bitcoin fits the definition of a commodity. Okay, makes sense.
But there aren't any My Big Coin futures contracts, so why would *it* be a commodity?
But there aren't any My Big Coin futures contracts, so why would *it* be a commodity?
5/ Here's where I think the ruling takes a huge & unjustified leap of logic.
Instead of analyzing My Big Coin specifically, the ruling says "My Big Coin and Bitcoin are both virtual currencies" & have "various characteristics [in] common" so My Big Coin is a commodity too. HUH?
Instead of analyzing My Big Coin specifically, the ruling says "My Big Coin and Bitcoin are both virtual currencies" & have "various characteristics [in] common" so My Big Coin is a commodity too. HUH?
6/ To support this conclusion, the ruling compares crypto to *natural gas.* No joke.
It says different types of gas are commodities even if each type doesn't have its own futures contract because they're "fungible" -- they pass through the same pipes, so they're the same by law.
It says different types of gas are commodities even if each type doesn't have its own futures contract because they're "fungible" -- they pass through the same pipes, so they're the same by law.
7/ But as we all know, bitcoin and "My Big Coin" don't pass through the same pipes. They have nothing in common at all, except that they've both been labeled "virtual currencies."
I don't think it makes any sense to blindly lump everything on a blockchain into the same category.
I don't think it makes any sense to blindly lump everything on a blockchain into the same category.
8/ To be clear, this ruling isn't that big of a deal.
It doesn't mean every crypto is now officially a commodity across the US. It just means the CFTC did a good enough job in this case to move on to the next stage. The question of how to classify digital assets will burn on.
It doesn't mean every crypto is now officially a commodity across the US. It just means the CFTC did a good enough job in this case to move on to the next stage. The question of how to classify digital assets will burn on.
9/ In the end, I think the court just didn't do the work necessary to understand crypto. This is a problem in every corner of the US government: in the halls of Congress, the offices of regulatory agencies, and the chambers of the judiciary.
We have a lot of work to do.
We have a lot of work to do.
10/ If you want to learn more about the CEA and how it defines "commodities," check out this great thread & solid counterpoint from @Conor0Hanlon. I highly recommend following him if you're interested in cryptolaw.
11/ To the extent Conor and I disagree, it's partly a function of our different roles.
He's a transactional lawyer: he helps you avoid disputes with the government. In that context, it's preferable to play it safe & assume you're subject to the jurisdiction of federal agencies.
He's a transactional lawyer: he helps you avoid disputes with the government. In that context, it's preferable to play it safe & assume you're subject to the jurisdiction of federal agencies.
12/ I'm a defense lawyer: I litigate those disputes if you don't hire Conor & the government says you broke the law.
My job is to challenge enforcement agencies when they overstep their bounds. To that end, I don't like when courts issue vague, overbroad & unhelpful rulings.
My job is to challenge enforcement agencies when they overstep their bounds. To that end, I don't like when courts issue vague, overbroad & unhelpful rulings.
13/ I mostly agree with Conor's explanation of the CEA & I can't say the *outcome* of the ruling is wrong. Perhaps My Big Coin should be viewed as a commodity.
My issue is one Conor identifies: there are some types of cryptoassets that *shouldn't* be commodities, such as NFTs.
My issue is one Conor identifies: there are some types of cryptoassets that *shouldn't* be commodities, such as NFTs.
14/ But the ruling makes no attempt to explore the nature & differences between types of cryptoassets. It just says "virtual currencies are commodities," full stop.
In my view, that's wrong. I wish the court had taken the time to add clarity & certainty to this issue instead.
In my view, that's wrong. I wish the court had taken the time to add clarity & certainty to this issue instead.
15/ The problem is, now the government can prosecute a case involving NFTs, label them "virtual currencies" (because what does that mean anyway?) & say the next judge should apply the same logic & treat them as commodities too.
To me, that's the very definition of bad law.
To me, that's the very definition of bad law.
