On June 18, 2019, the Commodity Futures Trading Commission (CFTC) announced the commencement of a civil enforcement action (the Complaint) against two United Kingdom-based defendants, a purported Bitcoin trading company and its principal (collectively, the Defendants). The CFTC alleges that the Defendants perpetrated a wide-ranging fraud involving at least $147 million in Bitcoin from more than 1,000 customers.
Specifically, the CFTC alleges that the Defendants fraudulently solicited customers to purchase and transfer Bitcoin to them. According to the CFTC, the Defendants also made numerous material misrepresentations and omissions to customers about their trading acumen, including that they earned outsized Bitcoin trading profits, used risk diversification methods to protect customers’ Bitcoin deposits and provided a safe haven from Bitcoin market risks. In actuality, the CFTC alleges that the Defendants made no trades on customers’ behalf, earned no trading profits for them and instead misappropriated their Bitcoin deposits.
To conceal the scheme, the CFTC alleges that the Defendants prepared bogus account balances and profit figures that falsely reflected trading profits that did not exist. They also allegedly created fabricated weekly Trade Reports, which identified illusory, purportedly profitable virtual currency trades that Defendants never placed.
Furthermore, according to the CFTC, the Defendants propagated an elaborate pyramid scheme called the “Affiliate Program.” Through this Affiliate Program, the Defendants fraudulently promised to pay escalating referral profits, rewards and bonuses in Bitcoin to so-called “Affiliates” who referred new customers to Defendants. Again, the CFTC alleges that Affiliates’ accounts, like other customer accounts, reflected sham balances that were not backed up by actual Bitcoin.
Finally, the Complaint alleges that the Defendants misappropriated customers’ Bitcoin deposits. On the one hand, the CFTC alleges that the Defendants executed a series of complex and uneconomical blockchain transactions to move customers’ Bitcoin into digital wallet addresses under Defendants’ control. Relatedly, the CFTC also alleges that the Defendants illegally diverted customers’ Bitcoin deposits to make Ponzi scheme-like payments to customers who requested account withdrawals. The Complaint alleges that these transactions lacked any valid business purpose and were designed solely to conceal misappropriation.
Relying on its antifraud authority, the CFTC seeks civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and permanent injunctions against further violations of the federal commodity laws. Notably, in the Complaint the CFTC reinforced its position that Bitcoin is a “commodity” for purposes of the Commodity Exchange Act, granting it authority to bring the case. With its sister agency the Securities and Exchange Commission taking the position that Bitcoin is not a security, the case is a stark reminder that the CFTC remains at the ready to police allegations of fraud in the market for Bitcoin and other cryptocurrencies.