Cause for Caution: Virtual Currency-Related Enforcement Actions

On January 19 the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) issued a joint statement warning about potential enforcement actions involving the offering of digital instruments: “When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws.”[1] In conjunction with this warning, the CFTC brought a number of virtual currency enforcement actions in January, three of which are discussed below.

CFTC v. My Big Coin Pay, Inc., Randall Crater, and Mark Gillespie.[2] On January 16, the CFTC brought an enforcement action charging fraud and misappropriation in connection with a virtual currency known as My Big Coin (“MBC”). The defendants allegedly solicited customers to purchase MBC by making false claims about its value, usage and other attributes. Specifically, the MBC website contained trade data and other materials that, as alleged, misrepresented: (i) that MBC was actively being traded on currency exchanges, including the MBC Exchange website; (ii) the daily trading price of MBC (when, in fact, no price existed because MBC was not trading); (iii) that MBC was backed by gold; and (iv) that MBC had partnered with MasterCard to make MBC available to use anywhere that MasterCard was accepted. The CFTC alleged that customer funds were in reality used simply to run a Ponzi scheme and to fund extravagant personal purchases by the defendants.

CFTC v. Dillon Michael Dean and The Entrepreneurs Headquarters Limited.[3] On January 18, the CFTC brought an enforcement action charging the defendants with essentially operating a Bitcoin-based Ponzi scheme. The defendants allegedly solicited the public to contribute a substantial amount of Bitcoin that purportedly would be invested in a pooled investment vehicle for trading in, among other products, binary options on a registered exchange. Customer deposits were solicited on the defendants’ company website as well as social media sites, with claims that the defendants were generating high returns through their options trading expertise. However, the CFTC alleged that the defendants did not in reality engage in any trading on behalf of their customers but, rather, simply used customer funds to pay other customers, in the manner of a Ponzi scheme.

CFTC v. Patrick K. McDonnell and CabbageTech, Corp. d/b/a Coin Drop Markets.[4] The defendants in this enforcement action, brought on January 18, allegedly induced customers to send both virtual currencies and fiat money in exchange for (i) trading virtual currencies on the customers’ behalf and (ii) virtual currency advice. However, the CFTC alleged that the defendants never actually traded on behalf of customers or provided any virtual currency trading advice but, rather, simply misappropriated the funds. To conceal their scheme, the defendants allegedly removed online materials and ceased communication shortly after obtaining customer funds.

The CFTC issued a press release for each of the above enforcement actions, highlighting that the action was brought in connection with the CFTC’s Virtual Currency Task Force. The three press releases also included comments by CFTC Director of Enforcement James McDonald emphasizing that virtual currency customers should exercise caution and noting the CFTC is increasingly focused on fraud in the sector.

[1] Joint Statement by SEC and CFTC Enforcement Directors Regarding Virtual Currency Enforcement Actions (Jan. 19, 2018) (available here).

[2] Press Release, CFTC Charges Randall Crater, Mark Gillespie, and My Big Coin Pay, Inc. with Fraud and Misappropriation in Ongoing Virtual Currency Scam (Jan. 24, 2018) (available here).

[3] Press Release, CFTC Charges Colorado Resident Dillon Michael Dean and His Company, The Entrepreneurs Headquarters Limited, with Engaging in a Bitcoin and Binary Options Fraud Scheme (Jan. 19, 2018) (available here).

[4] Press Release, CFTC Charges Patrick K. McDonnell and His Company CabbageTech, Corp. d/b/a Coin Drop Markets with Engaging in Fraudulent Virtual Currency Scheme (Jan. 19, 2018) (available here).