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27 September 2017 Reed Smith Client Alerts

On September 21, 2017, the U.S. Commodity Futures Trading Commission (“CFTC”) filed a complaint in federal court in the Southern District of New York against Gelfman Blueprint, Inc. and its CEO and head trader (the “Defendants”) for operating a bitcoin Ponzi scheme.1 With the significant uptick in initial coin offerings (“ICOs”) in recent months, regulators throughout the globe have turned their attention to digital assets, and the CFTC is no exception.2 This is the fourth enforcement action that the CFTC has brought involving digital currencies since it first declared its jurisdiction over these products in 2015. It marks the first time, however, that the CFTC has exercised anti-fraud authority over a scheme involving bitcoin spot transactions.3

Authors: Peter Y. Malyshev Kari S. Larsen The CFTC is asserting that the Defendants marketed interests in a pooled fund to investors by claiming that a computer program known as “Jigsaw” would trade bitcoin for the fund using a high-frequency, algorithmic trading strategy; but in fact, no such program existed.4 The Defendants created an account for Jigsaw at a digital currency exchange, but they controlled its trading, which was minimal. Notably, the Defendants used Internet chatrooms and social media websites, including Facebook and Instagram, to solicit customers by touting the success of their Jigsaw software. The CFTC claims they also developed a fake “interactive customer dashboard” with falsified balances, deposits and withdrawals.

According to the Complaint, the Defendants used falsified performance reports and promises of significant payouts to solicit more than $600,000 from customers for a pooled fund. Then the CFTC says the Defendants misappropriated nearly all of the customer funds. The CFTC claims the Defendants attempted to conceal the scheme by, among other things, staging a cyber-attack and asserting that it wiped the funds out.

Legal Considerations

The CFTC is charging the Defendants with fraud under its general anti-manipulation rule (CFTC Rule 180.1). The rule allows the CFTC to pursue civil penalties against persons for engaging in manipulative or fraudulent schemes involving commodities, as defined in the Commodity Exchange Act. The CFTC clarified that digital assets are encompassed within the broad definition of “commodity” in an order against Coinflip involving illegal off-exchange bitcoin futures and options in 2015.5 But unlike previous CFTC enforcement actions involving contracts (i.e., commodity interest contracts) on bitcoin (i.e., a commodity), this case did not involve derivative instruments.

Market participants must understand that CFTC enforcement actions may be brought under the fraud and manipulation provisions of the Commodity Exchange Act, even where commodity interest contracts are not involved in the scheme.6 The pooled fund that the Defendants fraudulently solicited investors to invest in did not trade futures or swaps (i.e., commodity interest contracts), and would therefore not qualify as a “commodity pool” under the CFTC’s regulations. Nevertheless, exercising its plenary jurisdiction, the CFTC pursued this case.


This case demonstrates that the CFTC will pursue persons who engage in fraud or manipulation in connection with digital assets under its general anti-manipulation and anti-fraud authority, irrespective of whether the scheme involves futures or swaps. Companies that wish to issue novel digital assets through tokens sales or ICOs must ensure that their offering materials and website are not misleading, and do not contain any material misrepresentations. Ever since the SEC issued its investigation report on The DAO Token a few months ago, many are abuzz over whether particular digital assets qualify as “securities.”7 This case illustrates that companies must be just as cognizant that the CFTC has claimed jurisdiction over all digital assets as “commodities.”

Companies issuing digital assets through token sales and ICOs often utilize electronic messaging software, such as Slack, and social media platforms, such as Facebook and Twitter, to solicit purchasers. The Defendants in this instance are accused of making clear misrepresentations to investors and potential investors, touting 7 percent to 9 percent returns, and the merits of the Jigsaw program. However, statements that are not intended to misrepresent or mislead may nevertheless be considered misrepresentative or misleading, and can give rise to a CFTC or SEC enforcement action under the relevant antifraud provisions. Companies must be extraordinarily cautious when communicating in Internet chatrooms or on social media with investors and potential investors.

Client Alert 2017-224


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