The proliferation of digital assets has raised a persistent question: who regulates them? Both the Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have claimed jurisdiction over different digital assets. Broadly speaking, the SEC regulates Initial Coin Offerings (ICOs) while the CFTC regulates “virtual currencies.” Cases involving ICOs are clear cut; in other situations, it can be much harder to discern which agency should have jurisdiction over a particular digital asset.
The CFTC has claimed jurisdiction over virtual currencies since 2014. But the agency’s position wasn’t vindicated until 2018, when two separate federal district court opinions ruled that virtual currencies fell under the purview of the CFTC as commodities. The first of the two cases, CFTC v. McDonnell, 287 F.Supp.3d 213, 228 (E.D.N.Y. 2018), held that Bitcoin—as well as other virtual currencies—qualify as commodities because they “are ‘goods’ exchanged in a market for a uniform quality and value.” However, it is not clear which other digital assets count as commodities rather than securities. The court in CFTC v. My Big Coin Pay, Inc. et al., 334 F.Supp.3d 492 (D. Mass. 2018) held that a scam digital currency called My Big Coin qualified as a commodity. This holding might imply a more expansive view of digital assets as commodities—yet the court in My Big Coin Pay seemed to base much of its reasoning on the allegedly false claim that the value of My Big Coin was essentially derived from the value of Bitcoin. It’s unclear how the court would have ruled if My Big Coin had been promoted as a standalone cryptocurrency.
The ambiguity surrounding the exact definition of ‘virtual currency’ and which particular digital assets qualify as virtual currencies (and therefore would be classified as commodities) could lead to a potential turf war between the SEC and CFTC. The SEC has consistently treated ICOs as sales of securities. After the ICO has actually occurred, however, it’s not clear whether the underlying digital asset itself should be regulated as a security or as a commodity. The SEC classifies digital assets based on the apparent purpose of the asset. Are people treating the asset as an investment to generate future returns? If so, the SEC says you’ve got a security. Are people using the asset more as a medium of exchange: to facilitate the purchase and sale of other assets or goods? Then you’ve got a commodity.
Although this commodity-security distinction is theoretically straightforward, it seems to have murky application in the real world. For example, why did people purchase My Big Coin? Was it to purchase something that could be used as a virtual currency, or was it because they thought My Big Coin would increase in value and thus generate profits? Reading the CFTC complaint against My Big Coin Pay Inc., it is easy to imagine that purchasers were attracted by the prospect of making money over finding money to use. Couldn’t the SEC have taken action here as well? And if so, why did the CFTC take charge rather than the SEC? More importantly, if both agencies claimed jurisdiction, how would a court decide which one should be permitted to bring suit? We will likely have to wait for a court or Congress to tell us.*
*Matt Garry is Managing Executive Editor on the Michigan Technology Law Review. He can be reached at email@example.com.