DOJ and CFTC Charge Individual for Crypto-related Market Manipulation Scheme
The DOJ and the CFTC filed parallel actions against an individual for engaging in a scheme to inflate prices in certain swap contracts on a decentralized exchange. The DOJ and the CFTC contend that the individual used those contracts as collateral to obtain large quantities of other digital assets.
In the criminal Indictment, the DOJ charged the individual with one count of commodities fraud, one count of commodities manipulation and one count of wire fraud. The DOJ alleged that the individual traded a large volume of futures contracts based on the price of the native token of an exchange and the USDC stablecoin between two accounts owned by the individual. The individual subsequently purchased a significant amount of the token to artificially increase the price, according to the document. The DOJ alleged that the individual then "borrow[ed]" digital assets (such as Bitcoin and Ether) from the exchange using the swap contracts as collateral and withdrew the assets from the exchange.
In the civil Complaint, filed in the Southern District of New York, the CFTC said that after the individual withdrew the assets from the exchange and stopped manipulating the price of the native token, the value of the token and in turn, the swaps used as collateral, decreased, becoming almost worthless. The CFTC alleged that the individual intended to default on the "borrowed" asset repayment at the time of the withdrawal. The CFTC reported that the individual admitted to orchestrating the scheme on multiple social media platforms.
The CFTC claims that the individual violated CEA Section 6(c)(1) and (3) ("Application for designation as contract market or derivatives transaction execution facility; time; suspension or revocation of designation; hearing; review by court of appeals"), Section 9(a)(2) ("Violations generally; punishment; costs of prosecution"), CFTC Rule 180.1(a) ("Prohibition on the employment, or attempted employment, of manipulative and deceptive devices") and Rule 180.2 ("Prohibition on price manipulation").
The agency is seeking relief in the form of (i) an order determining violations occurred and a related permanent injunction, (ii) monetary relief including civil/criminal penalties, disgorgement of gains, restitution and reimbursement of other administrative costs and (iii) any additional relief the court deems appropriate.
CFTC Commissioner Kristin N. Johnson said that the action emphasized the need for effective enforcement and strong customer protections for digital assets and warned investors of the susceptibility of novel technologies to misconduct, including fraud and manipulation. CFTC Commissioner Caroline D. Pham said that the CFTC remains well prepared to enforce the CEA in the digital asset space, regardless of the underlying technology.
Commentary
An ongoing question in crypto matters is whether relevant assets are "securities" or "commodity" transactions and whether the SEC or the CFTC has jurisdiction. In this case, the DOJ charges are brought under commodities laws (not securities laws) and the CFTC clearly takes the view that the relevant transactions here involved commodities and commodity interest transactions. In particular, the CFTC and the DOJ assert that the relevant swaps on MNGO/USDC are "swaps" under the CEA (not "security-based swaps"), implicitly taking a view that one or both of the MNGO token and USDC stablecoin are not securities.
According to several reports, the SEC is separately investigating the matter. While it would leave questions unanswered, there are theories that the SEC could take to bring a case without implicitly disagreeing with the CFTC and DOJ characterizations. Of course, all of this feels like an unnecessary game. Criminal and civil U.S. governmental agencies are bringing charges for the conduct in question; it's not clear what further charges would add. But it is clear that dueling enforcement actions would not be an efficient way to address the jurisdictional debate.