FxWirePro: “Clear the cloud over treatment of bitcoin” – A tussle between CME, Patrick McDonnell and Court

This article emphasizes on a recently happened scam on bitcoin futures, where Patrick McDonnell, an alleged cryptocurrency fraud confronts CFTC, and CME in turn contests court over treatment of bitcoin.

In recent prosecution, the US court ruling that Bitcoin is not a commodity would substantially disrupt the settled expectations of CME and numerous market participants who are trading bitcoin futures, CME warns.

Do remember since Derivative is a zero-sum game whether it is futures/forwards or options, we are competing against crores of traders who want to take our money out to make their profits. Thus defense of capital is so important to protect against huge losses.

The apparent role of the underlying security is merely to be itself. If there were no derivatives, traders would simply buy and sell the underlying. However, when it comes to derivatives, the underlying is the item which must be delivered by one party in the derivative contract and accepted by the other party. The exception is when the underlying is an index, or the derivative is a swap where only cash is exchanged at the end of the derivative contract.

The case in question is captioned Commodity Futures Trading Commission v. McDonnell et al (1:18-cv-00361) and was launched by the CFTC at the New York Eastern District Court in January this year. In brief, Defendants Patrick K. McDonnell, of Staten Island, New York, and CabbageTech, Corp. d/b/a Coin Drop Markets (CDM), a New York corporation, are charged with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.

In reply, the alleged Bitcoin fraudster strike down with all allegations by the CFTC and claims that virtual currencies are not commodities and, hence, the CFTC has no right to take an enforcement action against him.

Let’s now reminiscence that the judgment that virtual currencies are commodities was supported by the Chicago Mercantile Exchange (CME). It informed the Court of the reliance CME and financial market participants have placed on the determination by the CFTC in 2015 that virtual currencies such as bitcoin are “commodities” within the meaning of Section 1a(9) of the CEA. If the Court had ruled that a virtual currency such as bitcoin was not a commodity, this would have put in jeopardy CME’s and its market participants’ expectation to rely on the CEA and the CFTC’s regulatory protections for commodity derivatives contracts based on virtual currencies.

In conclusion, Patrick McDonnell, however, has challenged such an approach to Bitcoin. He insists that the CFTC complaint is “financially and politically motivated created out of thin air to secure the U.S. regulatory sphere surrounding Bitcoin and Virtual Currency markets”. He also claims that “the Chicago Mercantile Exchange (CME) was financially motivated to join the case”.

While CME seeks to intervene in this scam case, and insists that virtual currencies are to be treated as commodities which are the underlying securities for its futures contracts.

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