U.S. Court Rules Two Obscure Altcoins Are Commodities
The news followed a long-lasting dispute between the SEC and CFTC over when a cryptocurrency is a commodity or security.
A U.S. court has backed the Commodity Futures Trading Commission (CFTC) asserting greater regulatory jurisdiction over digital assets.
On July 3, Judge Mary Rowland of the Northern District of Illinois court entered a summary judgment against Sam Ikkurty, a man facing CFTC charges for operating a “classic Ponzi scheme” that extracted $83.7 million from investors.
The court found Ikkurty guilty of operating a Ponzi scheme through the purported “crypto hedge funds” Rose City Income Fund I (RCIF I) and RCIF II. Ikkurty told investors that 65% of RCIF funds were invested in “stable Proof-of-Stake tokens,” but invested 90% of funds in OlympusDAO’s OHM token. A substantial portion of the remaining funds were invested in KlimaDAO’s KLIMA.
Both assets suffered extreme price volatility, resulting in the value of RCIF I collapsing by 99% throughout 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 customers.
Notably, the court ruled that OHM and KLIMA qualify as commodity assets.
“Courts roundly recognize cryptocurrencies as falling under this broad definition,” Judge Rowland said. “This is because cryptocurrencies share a ‘core characteristic’ with ‘other commodities whose derivatives are regulated by the CFTC’… These factual similarities… allow the CFTC to expand its jurisdiction from ‘future’ contracts for commodities to ‘spot commodity fraud’.”
The judge determined that the Commodity Exchange Act “only requires the existence of futures trading within a certain [asset] class in order for all items within that class to be considered commodities.”
The court ordered Ikkurty to repay $83.7 million in customer losses and the disgorgement of nearly $37 million in collected commission fees.
Digital asset commodities
The ruling is significant as it appears to expand the scope of cryptocurrencies deemed commodities and subject to CFTC oversight beyond just those tracked by regulated U.S. futures products.
OHM and KLIMA are obscure digital — ranking 242nd and 786th by market cap. With a U.S. court determining that OHM and KLIMA qualify as commodities, the ruling may make it easier for other digital assets to receive commodity asset designations.
The news comes against the backdrop of a long-lasting conflict between the CFTC and the U.S. Securities and Exchange Commission (SEC) over when a cryptocurrency comprises 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 became tense between the SEC and CFTC concerning Ethereum (ETH), with the SEC going so far as to launch a secret investigation into whether ETH comprises a security in 2023, despite regulated futures products trading in the U.S. 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 of SEC rules” despite adhering to CFTC guidelines.
The SEC has since dropped its investigation into ETH and approved spot Ether ETFs It also appears that the SEC and CFTC will have to collaborate on U.S. crypto regulations after the passage of the Financial Innovation and Technology for the 21st Century Act (FIT21).
