Altcoins
US Court Rules Two Obscure Altcoins Are Commodities
The news follows a long-running dispute between the SEC and CFTC over when a cryptocurrency is a commodity or a security.
A US court has backed the Commodity Futures Trading Commission’s (CFTC) decision to exercise greater regulatory jurisdiction over digital assets.
On July 3, Judge Mary Rowland of the U.S. District Court for the Northern District of Illinois between summary judgment against Sam Ikkurty, a man charged by the CFTC with operating a “classic Ponzi scheme” that extracted $83.7 million from investors.
The court found Ikkurty guilty of operating a Ponzi scheme through the so-called “crypto hedge funds” Rose City Income Fund I (RCIF I) and RCIF II. Ikkurty told investors that 65% of the RCIF funds were invested in “proof-of-stake stablecoins,” but that he had invested 90% of the funds in OlympusDAOThe OHM token of . A substantial portion of the remaining funds was invested in ClimatDAO‘s KLIMA.
Both assets experienced extreme price volatility, leading to a 99% drop in the value of RCIF I in December 2021 and January 2022. Ikkurty was found guilty of distorting the performance and investment methodology of the funds and using investors’ assets to pay fraudulent dividends to clients.
The court held, among other things, that OHM and KLIMA were considered commodity assets.
“The courts have unreservedly recognized that cryptocurrencies fall within this broad definition,” Judge Rowland said. “This is because cryptocurrencies share an ‘essential characteristic’ with ‘other commodities whose derivatives are regulated by the CFTC’… These factual similarities… allow the CFTC to extend its jurisdiction from commodity ‘futures’ contracts to ‘commodity fraud detection.’”
The judge determined that the Commodity Exchange Act “requires only the existence of futures transactions in a certain [asset] class so that all items in that class are considered goods.”
The court ordered Ikkurty to repay $83.7 million in customer losses and disgorge nearly $37 million in commission fees.
Digital Asset Commodities
The move is significant because it appears to expand the scope of cryptocurrencies that are considered commodities and subject to CFTC oversight beyond those tracked by regulated futures products in the United States.
OHM and KLIMA are obscure digital companies, ranked 242nd and 786th respectively by market capitalization. With a U.S. court finding that OHM and KLIMA are commodities, the ruling could make it easier for other digital assets to receive commodity asset designations.
The news comes amid a long-running dispute between the CFTC and the U.S. Securities and Exchange Commission (SEC) over when a cryptocurrency constitutes a security or commodity.
The SEC has sought to characterize assets with proof-of-stake consensus or distributed to the public through a primary offering as securities.
The situation has become tense between the SEC and the CFTC regarding Ethereum (ETH), the SEC going so far as to launch a secret investigation to find out whether ETH is a security in 2023, despite regulated futures products trading in the United States since February 2021.
In March 2024, CFTC Chairman Rostin Behnam warned that the SEC’s apparent position that Ether is a security threatened to place CFTC-regulated exchanges that list Ether as futures contracts “in non-compliance with SEC rules” despite compliance with CFTC guidelines.
The SEC has since abandoned his investigation into ETH and approved ETF Ether spot It also appears that the SEC and CFTC will have to collaborate on US cryptocurrency regulation after the passage of the Financial Innovation and Technology for the 21st Century (FIT21) Act.