Court Maintains Bitcoin-Related Investment Scheme Is A Security Under The Federal Securities Laws

by Perkins Coie
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In response to the SEC’s first civil complaint arising from online virtual currency trading,[1] alleged Bitcoin Ponzi schemer Trendon Shavers recently challenged the district court’s authority to hear the case.  Shavers argued that the Bitcoin-related investments he solicited through his company, Bitcoin Savings and Trust, did not constitute “securities” as defined under the federal securities laws, and therefore the district court did not have jurisdiction to hear the case.  The SEC disagreed.  While the SEC did not argue that Bitcoin itself was a security, it argued that Shavers’ Bitcoin-related investment scheme was both an investment contract and a note, and thus met the definition of a security under the federal securities laws.  In a four-page opinion issued on August 6, 2013 by U.S. Magistrate Judge Amos Mazzant, the court sided with the SEC.[2]

While this case seems to highlight an important question that many in the virtual currency industry have been debating — whether Bitcoin is a security — the court’s decision never addresses this issue.  Rather, the court addressed only the SEC’s argument that the Bitcoin-related investment scheme, not Bitcoin itself, constitutes a security.  This is an important distinction.  The court examined the investment scheme and found that it fit the definition of an investment contract under the Supreme Court’s Howey case.  On that basis, and on that basis alone, the court found the Ponzi scheme investment was a security, and therefore held that it properly had jurisdiction to rule on the case.

Although this case may lack precedential value concerning the issue of whether Bitcoin is a security, one particular finding of fact made by the court in analyzing the issue is of some significance.  In attempting to determine whether the first prong of the Howey test was met — an investment of money — the court found that “Bitcoin is a currency or form of money.”  Depending on what the court intended the word “currency” to mean, this finding may be inconsistent with FinCEN’s March 18, 2013 guidance interpreting the status of virtual currency under the Bank Secrecy Act (BSA) and the money service business regulations adopted thereunder.[3]  Under the BSA regulations, “currency” is defined in pertinent part as “the coin and paper money of the United States or of any other country that is designated as legal tender . . . .”[4]  In the guidance, FinCEN drew a distinction between “real currency,” i.e., legal tender, on the one hand, with “virtual currency,” on the other.  It found that while “virtual currency . . . operates like a currency in some environments . . . it does not have all the attributes of real currency.  In particular, virtual currency does not have legal tender status in any jurisdiction.”[5]  In other words, in FinCEN’s view, Bitcoin and other virtual currencies are not “currency” as it is defined under the BSA.

Despite the apparent inconsistency with FinCEN’s Guidance, it is important not to make too much of the court’s factual finding that Bitcoin constitutes “currency or a form of money.”  The court did not invoke the BSA definition of currency, and appears instead to be applying the term “currency” and “money” broadly and in a different context. Unless and until a court rules on the specific question of whether Bitcoin constitutes “currency” as defined under the BSA, this decision has limited value.   

For the moment, the key point that should be taken from the court’s decision is that regardless of whether Bitcoin is a security or a form of currency, it can be packaged into an investment vehicle that falls within the SEC’s regulatory jurisdiction. 

For more information on important topics regarding virtual currency, please see Perkins Coie’s Decentralized Virtual Currency practice group web page:  http://www.perkinscoie.com/decentralized_virtual_currencies/

[1] See http://www.perkinscoie.com/news/pubs_detail.aspx?op=updates&publication=4404.

[2] See http://www.courthousenews.com/2013/08/06/Bitcoin.pdf.

[3] See http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html.

[4] 31 C.F.R. § 1010.100(m). 

[5] See http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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