CoinDesk reports:
A U.S. court has backed the Commodity Futures Trading Commission (CFTC) in exerting greater regulatory jurisdiction over digital assets.
On July 3, Judge Mary Rowland of the Northern District of Illinois issued a summary judgment against Sam Ikkurty. Sam Ikkourty faced charges from the CFTC for operating a “classic Ponzi scheme” that extracted $83.7 million from investors.
The court found Ikkurty conducted the Ponzi scheme through the so-called “crypto hedge funds” Rose City Income Fund I (RCIF I) and RCIF II. Ikkurty misrepresented that 65% of RCIF funds were invested in “stable proof-of-stake tokens,” while 90% of the funds were actually invested in OlympusDAO’s OHM token. A significant portion of the remaining funds was invested in KlimaDAO’s KLIMA token.
Both assets experienced extreme price volatility, leading RCIF I’s value to plummet by 99% between December 2021 and January 2022. Ikkurty was found guilty of misreporting fund performance and investment strategies, using investor funds to pay fraudulent dividends to clients.
Of note, the court ruled OHM and KLIMA qualify as commodity assets.
Judge Rowland stated, “The court fully acknowledges that cryptocurrencies fall within this broad definition,” adding, “This is because cryptocurrencies share a ‘core feature’ with other commodities subject to the Commodity Futures Trading Commission’s regulation…these factual similarities…enable the CFTC to expand its jurisdiction from futures contracts on commodities to ‘spot commodity fraud.'”
The court determined, under the Commodity Exchange Act, “as long as there is futures trading within a [class of asset], all items within that class may be considered commodities.”
The court ordered Ikkurty to repay $83.7 million in customer losses and nearly $37 million in commissions.
Digital Asset Commodities
This ruling is significant as it appears to broaden the scope of cryptocurrencies considered commodities and subject to oversight by the CFTC, beyond those tracked by regulated U.S. futures products.
OHM and KLIMA are obscure digital assets, ranked 242nd and 786th by market capitalization, respectively. With the U.S. court’s ruling that OHM and KLIMA qualify as commodities, the decision may make it easier for other digital assets to obtain commodity asset designations.
This development comes against the backdrop of longstanding conflicts between the CFTC and the U.S. Securities and Exchange Commission (SEC) over when cryptocurrencies constitute securities or commodities.
The SEC has sought to classify assets with proof-of-stake consensus or distributed to the public through a single issuance as securities.
Tensions between the SEC and the CFTC over Ethereum (ETH) have escalated, despite U.S. futures trading being regulated since February 2021. The SEC conducted a secret investigation into whether ETH constitutes a security as recently as 2023.
In March 2024, CFTC Chairman Rostin Behnam warned that the SEC’s clear stance on Ether being a security threatened exchanges listing Ether futures contracts regulated by the CFTC, despite compliance with CFTC guidelines, as “not adhering to SEC rules.”
Subsequently, the SEC dropped its investigation into Ethereum and approved spot Ethereum ETFs. With the passage of the Financial Innovation and Technology Act of the 21st Century (FIT21), exchanges and regulators seem compelled to collaborate on U.S. cryptocurrency regulation.
