Article source: TaxDAO
Written by: Tracy Tian, Ray
This is the first part of this article. Please stay tuned for the follow-up content released by TaxDAO.
1. Introduction
In the wave of digital economy, as an emerging asset class, the legal status and regulatory framework of cryptocurrency have always been the focus of heated discussions in the legal and financial circles. The anonymity, decentralization and convenience of cross-border circulation of cryptocurrency make it fundamentally different from traditional financial assets, which also brings unprecedented challenges to the existing legal system.
As the leader of global financial regulation, the United States' regulatory attitude and approach to cryptocurrencies has an important demonstration effect on the global market. The ruling in CFTC v. Ikkurty is not only a legal characterization of a specific cryptocurrency, but also an important exploration of the regulatory framework for the cryptocurrency market. Judge Mary Rowland's ruling pointed out that BTC and ETH, as commodities, should be regulated by the CFTC, a view that has aroused widespread discussion in all walks of life.
However, this ruling is not an isolated incident. Prior to this, there have been several cases involving the legal status of cryptocurrencies, such as SEC v. Telegram, in which the U.S. Securities and Exchange Commission (SEC) considered certain cryptocurrencies to be securities, requiring them to comply with securities laws. These cases together form the framework of the U.S. courts' regulatory logic for cryptocurrencies, reflecting the U.S. courts' cautious attitude and innovative thinking when facing emerging financial instruments.
This article aims to deeply analyze the legal position of cryptocurrencies such as BTC and ETH in the US courts, and explore the legal logic and regulatory concepts behind them. By combing through the CFTC v. Ikkurty case and other related cases, this article will reveal the considerations of the US courts in cryptocurrency regulation, including but not limited to the functionality of cryptocurrencies, trading methods, and the behavior of market participants. At the same time, this article will also conduct a comprehensive assessment of the commodity attributes of cryptocurrencies from the multi-dimensional perspectives of economics, finance, and law, in order to provide a more comprehensive thinking for the legal regulation of cryptocurrencies.
On this basis, this article will also conduct a forward-looking analysis of the potential impact of cryptocurrency regulation, including its impact on market participants, financial innovation, and the global financial regulatory landscape. Finally, combined with an in-depth interpretation and theoretical analysis of existing case law, this article will put forward our views on the legal positioning of cryptocurrency, aiming to provide a reference for the healthy development and effective regulation of cryptocurrency.
2. CFTC v. Ikkurty Case Background and Views of the Parties
As we delve deeper into the legal status of cryptocurrencies, it is necessary to examine a landmark case in detail: CFTC v. Ikkurty. This case has attracted much attention not only for its confirmation of the commodity attributes of cryptocurrencies, but also for its far-reaching impact on the regulatory framework of the entire cryptocurrency market. In the following section, we will analyze the background, facts, and views of the parties in detail to further understand the regulatory logic of the US courts on cryptocurrencies.
2.1 Case Background and Facts
Sam Ikkurty, through Ikkurty Capital, which he founded, called himself a "cryptocurrency hedge fund" and promised to bring investors generous returns through professional asset portfolio management. Ikkurty actively recruited investors using online platforms and trading exhibitions, claiming to be able to provide a stable return of 15% per year. However, the court investigation found that Ikkurty did not provide investors with the net returns it promised, but instead used a Ponzi scheme-like model to use the funds of new investors to pay early investors.
On July 3, 2024, Judge Mary Rowland of the U.S. District Court for the Northern District of Illinois entered a summary judgment in full support of the CFTC's complaint. The judgment found that Ikkurty and his company violated the Commodity Exchange Act (CEA) and relevant regulations of the Commodity Futures Trading Commission (CFTC), including multiple violations such as unregistered operations. The court also pointed out that in addition to Bitcoin and Ethereum, two other cryptocurrencies, OHM and Klima, also meet the definition of commodities and fall under the jurisdiction of the CFTC. The CFTC seeks compensation to investors, disgorgement of ill-gotten gains, civil penalties, permanent trading and registration bans, and a permanent injunction against Ikkurty and his company from further violations of the CEA and CFTC regulations in the future. In addition, the judgment requires Ikkurty and his company to pay more than $83 million in damages and $36 million in disgorgement of ill-gotten gains. The court also found that the defendants improperly misappropriated funds through the carbon offset program.
Ikkurty expressed his intention to appeal to the U.S. Supreme Court on social media and launched a donation campaign on his website to raise the funds needed for the appeal.
2.2 Overview of the Views of the Parties in CFTC v. Ikkurty
In CFTC v. Ikkurty, Ikkurty is accused of operating a Ponzi scheme by reallocating funds from new investors to pay returns to early investors rather than through true investment gains, and improperly misappropriating funds through a carbon offset program. The CFTC’s lawsuit alleges that Ikkurty and his company illegally raised more than $44 million in funds without proper registration, invested in digital assets and other instruments, and operated an illegal commodity pool. The CFTC’s lawsuit alleges that Ikkurty and his company violated the Commodity Exchange Act (CEA) and CFTC regulations, including fraud and failure to register. The CFTC also seeks a permanent injunction against Ikkurty and his company from further future violations of the CEA and CFTC regulations.
The CFTC claims that Bitcoin, Ethereum, OHM, and Klima are “commodities” as defined under the Commodity Exchange Act (CEA). The CFTC provides legal basis and precedent to prove that these cryptocurrencies meet the broad definition of commodities. The CFTC alleges that Ikkurty and his company defrauded investors by providing false information and misleading statements, such as exaggerating the fund’s historical performance and investment strategy. At the same time, the CFTC pointed out that Ikkurty and his company violated the provisions of the CEA by not registering with the CFTC as commodity pool operators (CPOs). The CFTC also proposed that Ikkurty improperly misappropriated funds through Jafia, an entity he controlled, and used funds from new investors to pay early investors, constituting a Ponzi scheme. The CFTC requested a summary judgment from the court based on the anti-fraud provisions of the CEA, as well as relevant regulations and judicial interpretations, and sought compensation and disgorgement of ill-gotten gains.
Ikkurty argued that he did not trade in commodities covered by the CEA, and that he was dealing in "wrapped bitcoin" and other cryptocurrencies, which should not be regulated by the CFTC. Ikkurty questioned the CFTC's regulatory authority over cryptocurrencies, arguing that the CFTC's claims exceeded its statutory authority. Ikkurty argued that he did not conduct actual commodity transactions as a CPO and therefore should not be considered a CPO. Ikkurty opposed the CFTC's request for restitution and disgorgement of ill-gotten gains, although the specific reasons for the objection were not elaborated in the document.
Court documents document the misleading information Ikkurty provided to potential investors in marketing RCIF II, including promises of a stable distribution of “net profits.” Ikkurty solicited funds from at least 170 participants through websites, YouTube videos, and other means, promising high returns through investments in digital assets, commodities, derivatives, swaps, and commodity futures contracts. The court also found that Ikkurty’s operations in constructing a portfolio were far more volatile than advertised to investors. Ultimately, the court affirmed the CFTC’s position that the cryptocurrencies involved were commodities as defined by the CEA. The court found that the evidence provided by the CFTC was sufficient to prove that Ikkurty and his company had committed fraud. The court ruled that Ikkurty and his company violated the CEA by not registering with the CFTC as a CPO. The court granted the CFTC a summary judgment requiring Ikkurty and his company to pay restitution and disgorgement of ill-gotten gains.
In this case, the court’s summary judgment order not only confirmed the CFTC’s jurisdiction over Ethereum as a commodity, but also made it clear that cryptocurrencies such as Bitcoin, Ethereum, OHM, and Klima are all within the CFTC’s jurisdiction. This ruling provides legal support for the CFTC’s anti-fraud actions in the cryptocurrency market and may affect future court rulings and regulatory approaches.
3. The court’s views, logic and analysis in relevant cases
Through a detailed analysis of the CFTC v. Ikkurty case, we can see the legal logic and regulatory philosophy of the US courts when dealing with cryptocurrency-related cases. However, the Ikkurty case is not an isolated case, and the US courts have also shown a consistent view on the attributes of cryptocurrencies in other related cases. Next, this article will sort out and analyze these cases, further explore the US courts' determination of the commodity attributes of cryptocurrencies and their logic, as well as the potential impact of these rulings on the regulation of the cryptocurrency market.
3.1 Related Cases
3.1.1 CFTC v. McDonnell
In CFTC v. McDonnell, Judge Jack B. Weinstein ruled in 2018 that Bitcoin is a commodity regulated by the Commodity Futures Trading Commission (CFTC). The case involved allegations of fraud involving virtual currencies, and the judge ruled that the CFTC has the authority to regulate virtual currencies such as Bitcoin. This ruling confirms the CFTC's regulatory authority over virtual currencies and provides a legal basis for fraud and market manipulation involving virtual currencies.
In the case, Patrick McDonnell and his company CabbageTech Corp. d/b/a Coin Drop Markets were accused of operating a fraudulent virtual currency trading scheme. They claimed to provide professional Bitcoin and Ethereum trading advice, but in fact failed to provide the promised services and took investors' funds for themselves. The court ultimately ordered McDonnell and CabbageTech Corp. to pay more than $1.1 million in damages and civil penalties, and prohibited them from engaging in further trading and registration violations.
The ruling in this case not only affects McDonnell personally and his company, but also provides legal support for the CFTC's regulation in the field of cryptocurrency, clarifies the legal status of virtual currency as a commodity, and provides a legal basis for the CFTC when handling fraud cases involving virtual currency.
3.1.2 CFTC v. My BigCoin
In 2018, the CFTC filed a lawsuit against My Big Coin Pay, Inc. and its founders, alleging that they conducted fraudulent sales through an unregistered exchange, claiming that My Big Coin was a "revolutionary cryptocurrency" when in fact it had no real business or investment value. Rya W. Zobel, a Massachusetts District Court judge, ruled in 2018 that virtual currencies are commodities under the Commodity Exchange Act. The case involved fraud involving My Big Coin (MBC), and the court held that the CFTC had the power to prosecute fraud involving virtual currencies and that MBC was a "commodity" under the Commodity Exchange Act because there were futures trading in virtual currencies such as Bitcoin.
This ruling strengthens the CFTC’s regulatory authority over the virtual currency market, confirms that virtual currencies meet the definition of commodities under the Commodity Exchange Act, and provides a legal basis for the CFTC’s anti-fraud and market manipulation efforts in the cryptocurrency space.
3.1.3 Uniswap Class Action Lawsuit
In the 2023 Uniswap class action lawsuit, investors filed a lawsuit against Uniswap Labs, its founders, and related venture capital institutions, claiming that the tokens purchased on the Uniswap platform were fraudulent. However, when Katherine Polk Failla, a judge in the Southern District of New York, dismissed the class action lawsuit against Uniswap in 2023, she clearly stated that Bitcoin and Ethereum are "crypto commodities" and not securities.
Investors filed a class action lawsuit against Uniswap Labs, its founders, and related venture capital institutions, claiming that the tokens purchased on the Uniswap platform were fraudulent and resulted in financial losses. They believe that these tokens are unregistered securities and that Uniswap, as a decentralized exchange, should be held liable. However, Judge Katherine Polk Failla dismissed the lawsuit, arguing that the decentralized nature of Uniswap makes it impossible to control which tokens are listed on the platform or interact with whom. Judge Failla made it clear in her ruling that Ethereum (ETH) is a commodity rather than a security. In addition, the judge also implied that Wrapped BTC (WBTC) is also a commodity, although it was not explicitly stated. The judge believes that Uniswap, as a decentralized autonomous organization (DAO), is not inherently illegal in its core smart contract and is able to legally execute transactions similar to cryptocurrency commodities ETH and Bitcoin. This ruling is of great significance to DeFi projects, indicating that protocol developers should not be held responsible for the misconduct of third parties.
Overall, there are significant differences in state-by-state approaches to classifying and regulating Bitcoin (BTC) and Ethereum (ETH) in the United States. For example, an Illinois court ruling deems BTC and ETH to be digital commodities under the Commodity Exchange Act, a position that provides clarity on cryptocurrency regulation in the state. Although, this classification is not a uniform standard across the United States, and other states and the federal government may have different positions and regulations. Wyoming, for example, has passed legislation that explicitly defines certain cryptoassets as property and provides a legal framework for cryptobanks and securities. However, through the analysis of these cases, we can also conclude that U.S. courts tend to treat cryptocurrency as a commodity rather than a security. This position is of great significance to the trading, supervision and market innovation of cryptocurrency. As the cryptocurrency market continues to evolve, these rulings will continue to influence regulatory policymaking and the behavior of market participants.
3.2 Regulatory requirements
In the United States, the regulatory framework for cryptocurrencies is jointly constructed by multiple agencies, among which the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) play the most critical roles. The regulatory concepts and methods of these two agencies differ in some aspects, and these differences have a profound impact on the classification, issuance, and trading of cryptocurrencies.
3.2.1 The roles of SEC and CFCT
The SEC is primarily responsible for regulating the securities market, including stocks, bonds, and other investment contracts. In the cryptocurrency space, the SEC generally considers certain types of cryptocurrencies to be securities and regulates them under the Securities Act. The position of SEC Chairman Gary Gensler, especially his views on Ethereum (ETH), indicates that the SEC may bring most cryptocurrencies under the regulatory scope of the securities laws, especially those initial coin offerings (ICOs) involving investment contracts. This classification is critical to determining the regulatory requirements for the issuance, trading, and related financial products of cryptocurrencies. The SEC's regulatory framework is mainly based on the Howey test in the Securities Act to determine whether a trading instrument constitutes an "investment contract" and is therefore considered a security. This test takes into account factors such as the investment of funds, the existence of a common enterprise, and the expectation of profits mainly from the efforts of others.
In contrast, the CFTC prefers to treat cryptocurrencies as commodities and regulate them under the Commodity Exchange Act (CEA). The CFTC's supervision focuses on preventing market manipulation and fraud and ensuring market fairness and transparency. Some legal cases have further strengthened the CFTC's regulatory power over cryptocurrencies. Some courts have supported the CFTC's position that the cryptocurrency products involved are commodities under the Commodity Exchange Act, thereby confirming the CFTC's jurisdiction over such commodities. The CFTC's regulatory framework requires cryptocurrency exchanges to comply with specific registration and compliance requirements, including capital, recordkeeping, and risk management.
This series of legal developments show that, on the one hand, U.S. courts and regulators hope to gradually provide a clearer legal framework for the cryptocurrency market to promote innovation while protecting the interests of investors. On the other hand, different trial and regulatory agencies have not yet reached a consensus on the characterization of cryptocurrencies.
3.2.2 The new impact of FIT21 on the characterization of cryptocurrencies
H.R.4763, the full name of which is the Financial Innovation and Technology for the 21st Century Act, is commonly referred to as the FIT21 Act. This legislation is an important attempt by the U.S. Congress to develop a regulatory framework for the digital asset sector. According to the announcement of the U.S. House of Representatives Financial Services Committee, the FIT21 Act was passed by the House of Representatives on May 22, 2024, marking an important step forward in the regulation of digital currencies and blockchain technology in the United States.
Section 101, Item 26 of the Act first defines digital assets and lists exclusions. The article stipulates that digital assets "mean any fungible digital representation of value that can be owned and transferred entirely by an individual without reliance on an intermediary and is recorded on a cryptographically secure public distributed ledger." However, digital assets do not include any notes, stocks, treasury stocks, securities futures, securities swaps, bonds, debt certificates, debt certificates... any puts, calls, crosses, options, privileges, and assets equivalent to options, futures, swaps, etc. Specifically in terms of jurisdiction, in the FIT21 Act, legislators proposed a new classification standard to determine whether specific digital assets should be regulated by the U.S. Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). The bill defines the concept of decentralization and proposes a method for classifying digital assets running on decentralized blockchains, dividing digital assets into three categories: restricted digital assets, digital commodities, and permitted payment stablecoins. The relationship between the three is that digital assets are generally restricted digital assets, unless they are self-certified as digital commodities or meet the definition of licensed payment stablecoins. Thanks to this, the SEC and CFTC can clarify the scope of their responsibilities and regulate restricted digital assets and digital commodities respectively.
In terms of regulation and exemptions, the FIT21 Act has taken an important step in establishing a legal framework for secondary market transactions in digital assets. This process specifically targets digital assets that are part of investment contracts, allowing them to be traded under certain conditions, thereby providing clarity and predictability for market participants. The Act imposes strict registration and compliance requirements on digital asset exchanges and intermediaries. These requirements not only involve preventing market manipulation and improving transaction transparency, but also ensure the fairness and security of transactions. The FIT21 Act also further strengthens investor protection by imposing comprehensive customer disclosure, asset protection and operational requirements on all entities that need to register with the CFTC and/or the SEC. These measures require entities to provide clear and accurate information to customers, properly keep customer assets, and comply with high standards of operating norms, thereby enhancing the overall transparency of the market. Specifically in terms of issuance supervision, the FIT21 Act provides registration exemptions for qualified digital asset issuers, which helps to reduce the compliance burden of issuers while ensuring that they comply with a series of regulations and restrictions. This balance is designed to encourage innovation without sacrificing the basic principles of regulation.
Although the FIT21 bill was voted through by the House of Representatives in May 2023 with majority support, it was opposed by President Joe Biden's policy statements. Therefore, the final outcome of the bill is still pending Senate deliberations and presidential approval. Although it has not yet come into effect, the passage of the FIT21 bill is seen as a watershed moment for the U.S. digital asset ecosystem, as it provides the necessary consumer protection and regulatory certainty for the development of digital asset innovation in the United States. The passage of the bill may also have an impact on crypto taxation and regulation, providing the IRS with clearer crypto asset classification standards, which will help tax crypto asset holders.
Overall, the different regulatory stances of the SEC and CFTC have had a significant impact on the cryptocurrency market. The SEC’s securities law regulatory framework requires cryptocurrency issuers to comply with a series of strict disclosure and registration requirements, which may limit the issuance and circulation of certain projects. The CFTC’s commodity law regulatory framework focuses more on regulating market behavior and provides more flexibility for cryptocurrency transactions. At the same time, the proposal and passage of the FIT21 bill provides a new legal basis for the supervision of cryptocurrency, is expected to unify the regulatory responsibilities of the SEC and CFTC, and provide a clearer legal environment for the innovation and trading of digital assets.
