On September 21st, the Commodity Futures Trading Commission (“CFTC”) announced the filing of charges against Nicholas Gelfman and Gelfman Blueprint, Inc. (the “Defendants”) for fraud, misappropriation, and issuing false account statements in connection with solicited investments in Bitcoin.  According to the allegations asserted by the CFTC, the Defendants operated a Ponzi scheme, misappropriated funds from investors, and took steps to conceal losses (including by staging a “hack” on its computer systems designed to conceal what were actually trading losses and depletion of funds due to misappropriation).

The enforcement action is notable for two reasons:

  • First, it is another articulation by the CFTC that Bitcoin and other virtual currencies are encompassed in the definition of a “commodity,” under section 1a(9) of the Commodity Exchange Act the “CEA”); and
  • Second, it emphasizes that section 6(c)(1) of the CEA and CFTC Regulation 180.1 grant the CFTC broad jurisdiction to combat fraudulent activity in respect of all transactions in interstate commerce that involve commodities, and not simply derivatives and futures contracts – or the trading of such instruments).

In respect of the second point, it is worth further noting that the CFTC has historically exercised its jurisdiction over fraud in the commodity markets when the fraud impacted the price of derivatives or involved the trading of a contract or instrument related to a commodity, instead of the commodity proper.  Although, this enforcement action indicates the willingness of the CFTC to bring actions when it perceives that abuses are present in the market for commodities and, notably, the market for virtual currencies.  In this regard, we note the following quotation from James McDonald, the CFTC’s Director of Enforcement, as presented in the press release accompanying the announcement of this enforcement action:

Through its work across the [CFTC], and as exemplified by the work of LabCFTC, the CFTC has demonstrated its continued commitment to facilitating market-enhancing FinTech innovation. Part of that commitment includes acting aggressively and assertively to root out fraud and bad actors in these areas. As alleged, the Defendants here preyed on customers interested in virtual currency, promising them the opportunity to invest in Bitcoin when in reality they only bought into the Defendants’ Ponzi scheme. We will continue to work hard to identify and remove bad actors from these markets.

The complaint filed by the CFTC is available here and the accompanying press release can be accessed here.

Good day.  Good to always be mindful of the “commodity” in Commodity Futures Trading Commission. DR2