On March 6, a Federal District Court in the Eastern District of New York entered a 79-page order that provides the Commodity Futures Trading Commission (CFTC) the power to pursue virtual currency fraudsters.
Judge Weinstein held that the CFTC has standing to seek relief related to misleading advice, fraudulent schemes, and misappropriation of virtual currencies, provided that the fraud does not directly involve the sale of derivatives or futures. “Until Congress clarifies the matter, the CFTC has concurrent authority, along with other state and federal administrative agencies, and civil and criminal courts, over dealings in virtual currency.”
After resolving the standing issue, the Court turned to CFTC’s request to shut down Cabbage Tech Corp. d/b/a Coin Drop Markets’, and its owner, Patrick McDonnell’s (the Defendants) virtual currency consulting business. According to the CFTC, the Defendants solicited customers both in the U.S. and worldwide to become members of groups that would receive Coin Drop Markets’ virtual currency consulting services for Bitcoin and Litecoin. Coin Drop Markets promised its customers profits of as much as a 300% return on an investment in less than a week. With all of the hype surrounding cryptocurrencies in recent years, thousands of customers signed up for Coin Drop Markets’ services.
Unfortunately, once the Defendants had obtained funds from customers for trading by Defendants on behalf of the customers, the Defendants stopped all communications with customers, shut down its website, and shut down its chat rooms. CFTC also alleges the Defendants kept all of the money. After conducting its own investigation, the Court issued a preliminary injunction in favor of the CFTC and against the Defendants.
Fraud is nothing new, but the decision represents a willingness by the Court to understand virtual currency in order to make an informed decision. “Emerging financial technologies broadly are taking us into a new chapter of economic history. They are impacting trading, markets and the entire financial landscape with far-ranging implications for capital formation and risk transfer,” said CFTC chairman J. Christopher Giancarlo before the U.S. Senate Banking Committee on Feb. 6 in Washington, the testimony of which was attached to Judge Weinstein’s order. “We are entering a new digital era in world financial markets. As we saw with the development of the internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response.”