Bitcoins; SEC Issues Fraud Charge and Alert; Conflict with CFTC to Come?
Commentary by Bob Zwirb
The SEC has charged the founder and operator of Bitcoin Savings and Trust ("BTCST"), with defrauding investors in a Ponzi scheme involving bitcoin, a virtual currency traded on online exchanges for conventional currencies like the dollar or to purchase goods and online services.
The SEC alleges that Shavers offered and sold bitcoin-denominated investments through the Internet, raising at least 700,000 bitcoin in BTCST investments amounting to more than $4.5 million in 2011 and 2012.
Separately, the SEC has issued an investor alert warning investors of the threat of potential investment scams involving virtual Internet currencies. The SEC alert cautioned investors to be wary of common warning signs which may indicate a Ponzi scheme, including:
- High investment returns with little or no risk;
- Overly consistent returns;
- Unregistered investments;
- Unlicensed sellers;
- Secretive and/or complex strategies and fee structures;
- Issues with paperwork;
- No minimum investor qualifications; and
- Difficulty receiving payments.
See: SEC Investor Alert; SEC Charges Shavers Press Release.
See also: Bloomberg Interview with CFTC's Chilton on Possible Regulation of Bitcoin; CNBC Video: CFTC Explores Bitcoin; Fox Interview with Chilton on Bitcoin; Wall Street Journal: Bitcoin vs. Ben Bernanke.
Commentary
The SEC enforcement action involves a typical fraudulent Ponzi scheme with an alleged wrongdoer promising investors up to 7% interest a week, but instead misappropriating and misinvesting their money. What is atypical about the case is the vehicle chosen to commit the fraud - bitcoin, which is a virtual currency that is traded on online exchanges for conventional currencies or for goods and services. While one bitcoin traded for about $6.56 on average between September 2011 and September 2012, the coins currently trade for about $95 each, and have traded above $200 per coin. According to a recent article in the Wall Street Journal, the bitcoin is a "virtual currency [that] has no intrinsic value and isn't tied to anything that does," that nevertheless is accepted by "[t]housands of mostly small online merchants."
The fact that fraudsters have gravitated to this new form of currency is not surprising. What may be is the SEC's treatment of the transactions here as "securities," presumably from the promise of payment of interest to investors through arbitrage. Indeed, the fraud that the SEC alleges took place here was committed, according to the Complaint, against "purchasers of securities." The SEC action comes only two months after CFTC Commissioner Bart Chilton raised the prospect of regulation by his agency in several high-profile interviews. In those interviews, Mr. Chilton advocated a federal interest in regulating this currency by the CFTC and either the Treasury or the Federal Reserve, not the SEC. So it will be interesting to see whether another SEC/CFTC jurisdictional battle, or even an SEC/CFTC/Banking regulator battle unfolds over a currency whose attractiveness to investors and commercial parties is the fact that it is not subject to regulation nor tied to central bank policies.