Regulation
US Court Rules Two Obscure Altcoins Are Commodities
The news comes after a long-running dispute between the SEC and the CFTC over when a cryptocurrency is considered a commodity or a security.
A US court has upheld the Commodity Futures Trading Commission (CFTC), asserting greater regulatory jurisdiction over digital assets.
On July 3, Judge Mary Rowland of the Northern District Court of Illinois entered a summary judgment against Sam Ikkurty, a man accused by the CFTC of running a “classic Ponzi scheme” that extorted $83.7 million from investors.
The court found Ikkurty guilty of operating a Ponzi scheme through the alleged “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 “stable Proof-of-Stake tokens,” but he invested 90% of the funds in Olympus DAOOHM token. A substantial portion of the remaining funds was invested in ClimateDAOby KLIMA.
Both assets experienced extreme price volatility, resulting in a 99% collapse in the value of RCIF I between December 2021 and January 2022. Ikkurty was found guilty of misrepresenting the funds’ performance and investment methodology and using investors’ assets to pay fraudulent dividends to clients.
In particular, the court ruled that OHM and KLIMA are considered commodity businesses.
“The courts have consistently recognized that cryptocurrencies fall under this broad definition,” Judge Rowland said. “That is because cryptocurrencies share a ‘fundamental characteristic’ with ‘other commodities whose derivatives are regulated by the CFTC.’ … These factual similarities … allow the CFTC to expand its jurisdiction from commodity ‘futures’ contracts to ‘spot commodity fraud.’”
The judge ruled that the Commodity Exchange Act “only requires that futures trading exist within a certain [asset] class so that all items within that class are considered goods.”
The court ordered Ikkurty to repay $83.7 million in losses suffered by customers and return nearly $37 million in fees collected.
Digital Asset Commodities
The ruling is significant because it appears to broaden the scope of cryptocurrencies that are considered commodities and subject to CFTC oversight, beyond those monitored by regulated U.S. futures products.
OHM and KLIMA are dark digitals, ranking 242nd and 786th respectively by market cap. With a U.S. court ruling that OHM and KLIMA qualify as commodities, the ruling could make things easier for other digital resources to receive asset designations as raw materials.
The news comes against the backdrop of a long-running conflict between the CFTC and the U.S. Securities and Exchange Commission (SEC) over when a cryptocurrency is considered a security or a commodity.
The SEC has sought to characterize assets that are Proof of Stake consensus or distributed to the public through a primary offering as securities.
Things have gotten tense between the SEC and the CFTC over Ethereum (ETH), with the SEC even going so far as to launch a secret investigation whether ETH will be a security in 2023, despite regulated futures products having been traded in the US since February 2021.
In March 2024, CFTC Chairman Rostin Behnam warned that the SEC’s apparent position that Ether is a security threatened to put CFTC-regulated exchanges listing Ether as futures contracts “in noncompliance with SEC rules” despite adhering to CFTC guidelines.
Since then the SEC has fallen his investigation into ETH and approved spot ETF Ether It also looks like the SEC and CFTC will have to work together on cryptocurrency regulation in the US after the ride of the Financial Innovation and Technology for the 21st Century (FIT21) Act.