While many believe that the off-exchange trading platforms in Bitcoin bypass fiat central banks, there are developments in the legal world that warn of regulation is headed into the field with a vengeance. There were three important recent actions in federal courts that illustrate the interplay among the Securities and Exchange Commission (SEC) & Commodity Futures Trading Commission (CFTC) federal regulators seeking to expand their jurisdiction into the virtual currency world. This movement to expand their jurisdiction does not come from Congress. Instead, they charge people and create legal precedents and this is how most “law” is actually made. Clearly, these actions illustrate that they are moving into the virtual currency arena. The three cases are:
- On September 26, 2018, Judge Rya W. Zobel of the U.S. District Court for the District of Massachusetts handed down an important decision in a case alleging the fraudulent sale of a virtual currency called My Big Coin (MBC).2 In denying the defendants’ motion to dismiss, Judge Zobel confirmed the CFTC’s sweeping assertion of authority to police virtual currency markets under the antifraud and manipulation provisions of the Commodity Exchange Act (CEA) and its implementing regulations.
- On September 11, 2018, Judge Raymond J. Dearie of the U.S. District Court for the Eastern District of New York denied a motion to dismiss the United States’ indictment for fraud under the Securities Exchange Act of 1934 (Exchange Act) in connection with the sale of virtual currencies claimed to be backed by real estate and diamonds. In denying the defendants’ motion to dismiss, Judge Dearie found that the virtual currencies at issue could reasonably be considered investment contracts and thus securities
- On September 27, 2018, the SEC and the CFTC filed parallel complaints in the U.S. District Court for the District of Columbia against an online trading platform and its CEO offering swaps based on underlying securities and commodities funded with bitcoin, alleging violations of the federal securities and commodities laws.
My biggest concern is that it will be a tiny step for mankind to declare off-exchanges to be illegally operating without registration and it would not be too far behind for them to be criminally prosecuted under money laundering just like any bank for the failure to report every individual trading on these platforms. I would suspect we will see the further expansion into the virtual currency world by the SEC, CFTC, and DOJ long before we see any real legislation from Congress. They will ALWAYS pick the worse cases to make law and then apply it to everyone.