The Securities and Exchange Commission (SEC) is seeking more than $10m from the cryptocurrency mining firms GAW Miners and ZenMiner in connection with its ongoing securities fraud suit.
The agency filed suit against the firms and former CEO Homero Josh Garza in December. The SEC sought a motion for entry of default against the firms last month.[1][2]
Garza and the companies are accused of defrauding investors, and operating a Ponzi scheme in connection with its now-defunct mining service by selling more mining power than it actually possessed.
The SEC argued in its motion for default judgment, filed on 12th February, that Hashlets – mining contracts sold by GAW in 2014 through an internal market it maintained – constitute securities under the Securities Act and Exchange Act.
The filing states:
“The Commission respectfully requests that this court enter final judgment against defendants GAW Miners and ZenMiner and that that judgment permanently enjoin those entities from future securities law violations and order them to pay disgorgement and prejudgment interest of $10,384,099 and an appropriate third-tier civil penalty.”
The agency further alleged that GAW and ZenMiner made material misrepresentations to its customers, resulting in more than $19m in revenue tied to the sale of Hashlets. These sales, the SEC said, were buoyed by public statements made by Garza.
“In addition, GAW Miners obtained money, in the form of additional Hashlet investments, as a result of public statements made by its CEO that the company knew or should have known were false,” the agency said.
Notably, the SEC did not name Garza as one of the parties in the filing, in light of a recent court approval for an extension of time to response to the suit.
Marjorie Peerce, the defense attorney representing Garza, did not immediately respond to a request for comment.
Collapse fallout continues
GAW Miners collapsed last spring amid the market decline of its alternative cryptocurrency, paycoin[3], and growing scrutiny of its business practices.
Details of the SEC’s investigation of GAW were first reported[7] by bitcoin news blog Coin Fire. The company denied the existence of the suit, but information was disclosed following the release of GAW staff emails and, later, a lawsuit filed by the agency against Garza’s brother, who acted in a senior sales capacity for the company.
The full motion for default judgment can be found below:
UPDATE (17th June 20:00 BST): This report has been updated with a response to the SEC settlement from Sand Hill creator Gerrit Hall.
The US Securities and Exchange Commission (SEC) has settled with Sand Hill Exchange, an experimental stock market that used bitcoin.
Sand Hill[1], a Boost VC graduate that began operating late last year, agreed to pay a $20,000 settlement for alleged violations of US securities law, according to an SEC release[2].
The founders of the site, the statement claims, did not admit to or deny the allegations but agreed to the SEC’s cease-and-desist order.
Sand Hill had pitched itself as an experiment, allowing investors to purchase synthetic shares in unlisted Silicon Valley companies, akin to a fantasy sports version of the stock market.
The agency said in its settlement announcement:
“An SEC investigation found that Silicon Valley-based Sand Hill Exchange was offering and selling security-based swaps contracts to retail investors outside the regulatory framework of a national securities exchange and without the required registration statements in effect.”
News that the site was under investigation surfaced earlier this month, when Sand Hill published a now-redacted[3] blog post that outlined how the site had faced inquiries from the federal agency in April.
According to its main page, all money deposited by users has since been refunded.
SEC official Reid Muoio said in a statement that “we were able to act quickly before any losses materialized in this offering that occurred outside the proper regulatory framework.”
Sand Hill responds
In a video statement[4] posted to the company’s blog[5], Sand Hill creator Gerrit Hall responded to the SEC settlement, remarking that “I personally accept all responsibility for any and all wrongdoing throughout the entirety of Sand Hill Exchange.”
He explained that the SEC’s involvement was sparked by a decision in March to allow users to pay using bitcoin during a private beta.
Hall explained:
“I believed the 2006 UIGEA provided a carve-out for skill-based competitions with parimutuel outcomes. The SEC found otherwise, determining this constitutes a securities-based swap. We have complied with their cease-and-desist order, terminated our beta and refunded our friends.”
Hall added that he intends to continue operating Sand Hill “without any real currency”, and called for the creation of flexible financial innovation frameworks, or “sandboxes”, echoing statements from others in the digital currency space.
Ahmed served as a general partner at Oak, which took part in Circle’s $17m Series B[3] round.
Two companies said to be under the control of Ahmed, Iftikar Ali Ahmed Sole Prop and I-Cubed Domains LLC, were named as relief defendants in the complaint. $55m in assets were frozen per an emergency court order.
‘Illicit profits’
Ahmed is understood to have stepped down from Circle[4]’s board of directors after a separate SEC suit[5] was filed in early April. Ahmed was arrested and accused of pocketing more than $1m in illicit profits as a result of insider trading, as reported at the time by Fortune[6].
The new SEC complaint outlined a series of transactions during which Ahmed is said to have accrued roughly $27.5m. This total includes $18m that was unlawfully directed toward a bank account alleged to be under Ahmed’s control following the use of $20m to purchase $2m-worth of shares in an e-commerce venture.
Ahmed is also said to have steered Oak funds into other investments in which he had an ownership interest that he did not disclose.
The agency is also pursuing a broader court order against the investor, which includes additional fines and damage payments, it said:
“The SEC is seeking a preliminary injunction to continue the freeze of Ahmed’s assets and seeks to have Ahmed return his allegedly ill-gotten gains with interest and pay civil monetary penalties.”
Jared Marx is an attorney at Washington, DC law firm Harris, Wiltshire & Grannis[1]. He advises companies about bitcoin-related regulatory law and represents companies and individuals in civil and criminal proceedings.
Here, he discusses what cryptocurrency businesses should consider if they find themselves face-to-face with a US government subpoena, interview or search warrant.
Cryptocurrency businesspeople are a hearty bunch. They deal not only with the ordinary anxieties of running a startup, but also with a lack of clarity on a whole range of fundamental legal issues. (Remember when people were still asking whether bitcoin was even legal?)
One upshot of this is that a number of companies – including many who have tried hard to comply with applicable laws – have found themselves either receiving investigative subpoenas or subject to civil or criminal enforcement action.
Since regulatory uncertainty is likely to persist for some time, here’s a primer on things to consider when the US government knocks at your door (either figuratively or literally).
1. Subpoenas
Virtually every US government agency has the power to demand documents from businesses that operate under its regulatory supervision. Generally speaking, the way that the government does this is by issuing a subpoena (sometimes styled as the essentially-identical ‘civil investigative demand’).
Importantly, while the government doesn’t need to go to a judge (or anyone else) to issue a subpoena, an agency must go to a judge to enforce a subpoena. That means that when a party doesn’t respond to a subpoena, the agency must first convince a judge that it issued a valid subpoena before anyone will compel the target to produce documents or items.
However, when a party ignores a subpoena, the agency likely will go to a judge, and that will almost certainly make things worse. An agency who asks a judge to enforce a subpoena because it has received no response usually gets what it wants, even if the subpoena was overly broad.
“US regulatory law is stunningly broad, and the consequences of an investigation gone wrong can be crippling.”
Indeed, if there’s a criminal investigation in play, the agency may change its mind and seek a search warrant rather than a subpoena, and raid the offices where it’s looking for files. That’s definitely worse.
On the other hand, the fact that subpoenas aren’t self-enforcing also means that they’re negotiable.
Most agencies issue cookie-cutter subpoenas, asking for broad and often burdensome productions of documents. Truth be told, those agencies would rather not try to justify an overbroad subpoena to a judge. Just as often, they only issued a broad subpoena because they weren’t sure what they wanted in the first place.
The first step that experienced companies usually take after receiving a subpoena is to have their lawyer call the agency to ask what they’re really after. Especially in the cryptocurrency space, where government actors may or may not fully understand the technology, there’s a good chance of getting the government to agree to a ‘narrowing letter’, which limits what’s being asked for in the subpoena.
Only very seldom can lawyers convince the government to simply go away, but a narrowing letter often saves a lot of time and money by significantly limiting the subpoena’s reach.
When a subpoena is truly out of line, parties can also go to court to ‘quash’ (or cancel) the subpoena as improper or overly broad. But that’s a lot easier to do when the challenging party is the first one to the judge, and the agency hasn’t already been there complaining about how the target thumbed its nose at them.
2. Interviews
US federal law makes it a felony to intentionally lie to government agents. It’s like being under oath any time you talk to a government agent – except that it’s actually worse: if you testify in a courtroom, a stenographer records your testimony in open court. But when you talk to an FBI agent, the only record of your conversation are the notes that the agent writes up back in their office.
So the first problem is obvious: the agent conducting the interview may hear only what they wants to hear, or they may simply make honest – but ultimately harmful – mistakes in recording the interview.
Moreover, federal agents are permitted to, and regularly do, lie to suspects or witnesses when conducting an investigation. So the mere act of engaging in conversation with an agent can be treacherous.
Even if – and maybe especially if – a person has “nothing to hide”, most defense lawyers will agree that the safest bet when an agent asks for an interview is to treat the agent respectfully and politely, but to decline an interview at that time.
A lawyer can then follow up with the agent, and if an interview truly is in the person’s best interest, the lawyer will also arrange to be present for it.
3. Search warrants
Finally, in criminal matters, the government sometimes skips subpoenas and gets a search warrant from a court.
Unlike a subpoena, a search warrant gives the government the power to search a party’s premises itself and remove items (including computers) listed on the warrant.
At the moment agents show up with a search warrant, the target can’t do much to stop the ensuing search. But many parties (and their lawyers) nevertheless stay for the whole search, because staying can help set the stage for what comes next. This is primarily because there are many laws about what constitutes a proper search, and sometimes a party’s eyewitness testimony describing a search can be helpful if the government does something wrong.
One risk of staying for the search is that this puts important players in the presence of government agents for a long time, which means that there’s more opportunity for agents to try to engage targets in conversation.
The challenge here is not only remaining disciplined about not engaging, but also continuing to be polite to the agents conducting the search. However, this is not an insurmountable task.
Another risk of staying for the search is that the government can ask a party who is present for permission to conduct searches beyond what’s in the search warrant. Consenting to that kind of enlargement is not required, and doing so is very seldom worth the associated risk of unintended consequences. Simply knowing this, however, reduces the risk that a party will thoughtlessly consent.
With some luck and ingenuity, most cryptocurrency businesses may hope to avoid unwanted government scrutiny. However US regulatory law (and, even more so, criminal law) is stunningly broad, and the consequences of an investigation gone wrong can be crippling.
So when luck’s not enough, smart lawyering and some preparation can make the difference between a government investigation that is a mild headache and one that is a train wreck.
Disclosure: This is not legal advice, and is not intended to establish an attorney-client relationship. You can reach Jared at [email protected][4]
Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.
Jared Marx is an attorney at Washington, DC law firm Harris, Wiltshire & Grannis[1]. He advises companies about bitcoin-related regulatory law and represents companies and individuals in civil and criminal proceedings.
Here, he discusses why a new securities ruling is a potential boon for ‘crypto 2.0[2]‘ and ‘bitcoin 2.0’ companies operating in the US.
On Wednesday, the US Securities and Exchange Commission (SEC) adopted regulations permitting crowdfunding for business startups.
The new rules[3] give businesses in the blockchain ecosystem an avenue to get financial backing from the best-educated investors out there: their users.
I wrote last week[4] about the challenges that ‘bitcoin 2.0’ companies face from the squishy definition of a “security” under US law. These new rules don’t resolve that ambiguity, but they do create a low-cost safe harbor for businesses that want to avoid uncertainty (and possible criminal exposure) by simply treating their token sales as sales of securities.
Here’s how it works: prior to these rules, a company could generally sell securities only to wealthy individuals or after going through expensive registration with the SEC.
Now, companies can file a mini-registration statement with the SEC and then sell securities to ordinary people, including over the Internet.
As an added bonus, state-level compliance under these rules is minimal, as the SEC has largely preempted state securities laws in this area. There is, of course, a whole bunch of fine print.
Businesses that choose this route, for example, will need audited financial statements, and will have to do some ongoing reporting to the SEC. There are also limits on how much capital you can raise this way, though those limits — $20m or $50m, depending on which “tier” of the rule you use — are unlikely pose problems for most companies in the space.
Similarly, companies can accept only a certain amount of money from each investor. But again, the limit is relatively high — 10% of each investor’s wealth or yearly income — and even better, companies can generally rely on investors to self-certify that they’ve met this requirement.
Other details are more mundane, but also put this firmly in the don’t-try-this-at-home category: There are rules about sales by affiliates, rules about pre-sale “solicitations of interest,” and lots of rules about what goes in the mini-registration statement. Prior “bad acts” can also disqualify a company from using the provisions, and only US and Canada based (and incorporated) issuers qualify.
These new rules are good — and potentially revolutionary — for bitcoin 2.0 companies.
But they’re also good for all companies in the bitcoin ecosystem, who can take advantage of them to raise capital from their tech-savvy pool of users. Selling securities this way still isn’t a walk in the park — it will place some additional burdens on companies and require careful legal advice. But it is decidedly good news that companies can now count this path as among their options.
Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.
Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.
Jared Marx is an attorney at Washington, DC law firm Harris, Wiltshire & Grannis[1]. He advises companies about bitcoin-related regulatory law and represents companies and individuals in civil and criminal proceedings. Here, he discusses why securities law is problematic for bitcoin 2.0 companies operating in the US.
It is now almost commonplace to see a crypto 2.0 company raise development capital by pre-selling tokens to be used in their proposed project.
Ethereum’s multi-million dollar sale of ‘ether’ – the ‘fuel’ for running its proposed blockchain system – stands out as the most successful to date, but Ethereum is in no way alone.
The development of this business practice has spawned yet another area of regulatory uncertainty in an industry where legal ambiguity is the norm: American federal securities regulation.
Are tokens securities?
In short, if those tokens are securities under US federal law, their sale in the United States must either be registered with the SEC (costly and onerous), or there must be an applicable exception to registration (generally meaning that they can only be sold to wealthy people).And somewhat contrary to common sense, the fact that the CFTC thinks that bitcoins are commodities[2] does not, for now, have a significant impact on figuring out whether an offering is a security.
While there are better and worse practices for making the case that a company’s particular token is not a security, predictability and a general resolution of this issue is unlikely in the near term.
The reason for persistent uncertainty on this question is that, unlike other areas of law where legal ambiguity stems primarily from the novelty of cryptocurrency, here more generic questions of law remain open to debate.
First, the fundamental federal laws regulating securities were passed during the Great Depression, so not only did Congress write the relevant rules in a paper-and-pencil world, but Congress wrote them with the belief that broad government control of markets was necessary to avoid another disaster like the 1929 crash.The statute is therefore expansive rather than carefully tailored.
Second – and this is what innovators looking for clarity should understanding more deeply – United States courts have created a system for identifying whether something is a security that is impressionistic rather than rule bound.This means that, barring clarification from the SEC, it is very difficult to predict with certainty how a court would rule on cryptographic token sales.
SEC vs WJ Howey Co.
The law doesn’t leave parties totally in the dark – there is a nominal test to determine if something is a security.You ask whether a given scheme involves “[1] an investment of money [2] in a common enterprise [3] with profits [4] to come solely from the efforts of others”.
That language is from a 1946 United States Supreme Court case called SEC v WJ Howey Co.But the facts of that case, rather than its language, tell more of a story about how you can (or often can’t) predict whether something will be called a security.
In that 1946 case, a company called Howey in the Hills owned an orange grove in Florida, and offered to sell small parcels of it to tourists who stayed in an affiliated hotel.Howey told interested tourists that, if they bought a parcel of land, then as a practical matter they should also arrange to have someone tend and harvest their orange trees.
“The impressionistic nature of the rules cuts both ways: things that look like a security risk being called one, but an offering that doesn’t look like a security stands a good chance of staying out of the line of fire.”
Howey then suggested that – surprise – they were the best company to do that.Purchasers who hired Howey to tend their trees (and 85% of purchases did so) gave Howey exclusive rights to the land for 10 years, without any right to cancel the contract.
In short, Howey set up a system that would more or less allow it to get investors without actually selling ownership in Howey’s business itself.The SEC found out, and sued to stop Howey under the securities laws.
In response, Howey convinced two lower courts they hadn’t offered a security for sale.But the United States Supreme Court was unimpressed.The Justices said the law required them to look past legal formalities, and that, under the spirit of the Securities Act, Howey had offered a security.
To the Justices, the structure of the offering (a sale of land, plus a management contract) was less important than the fact that, in their view, the offering was an attempted end-run around the general rule that you have to get regulatory approval before you allow the general public to invest in your business. In doing so, the High Court established what came to be a consistent focus on a general standard rather than an articulated rule in this area.
In a later case, for example, the Court conversely deemed shares of ‘stock’ in a low-income housing development not to be securities, even though the word ‘stock’ appears in the statutory definition of a security.In that case, the Supreme Court again held that labels matter little, and that the housing development stock – which could not materially appreciate in value and could only be owned by a tenant in the development – was little more than a way of organizing leaseholds.
Reducing uncertainty
The Court has also rejected other potentially useful markers for whether something is a security.For example, the Supreme Court has held that participation in the revenues of an enterprise is not required for an investment to be a security, and that the expected “profit” from a security can come solely from market appreciation of the purchase.
Nonetheless, companies that want to presell tokens or pursue other similar sources of funding should not despair.First, there is some potential relief on the way, through regulations mandated by the JOBS Act, which would allow ordinary people to purchase unregistered securities offered by small businesses – though those regulations have not yet materialized.
Moreover, United States courts – and the SEC – have ruled on hundreds of different types of offerings, and those precedents are helpful in determining the best way to move forward in this area.Further, the impressionistic nature of the rules cuts both ways: things that look like a security risk being called one, but an offering that doesn’t look like a security stands a good chance of staying out of the line of fire.
So while a lack in legal clarity in token sales looks to be unavoidable for now, careful companies and careful lawyers can still find ways to reduce uncertainty.
Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.
The operator of two unlicensed digital currency exchanges has been ordered to pay more than $68,000 after a lengthy investigation by the US Securities and Exchange Commission (SEC), the country’s top securities regulator.
Ethan Burnside was 100% owner and operator of BTC Trading Corp, parent company of platforms BTCT Co[1] and Litecoin Global Exchange[2] (LTC Global) from August 2012 until trading and account activity ceased in October 2013. The amount Burnside will pay is equal to all profits he made from the exchanges, in addition to the fine.
Burnside cooperated with the SEC investigation and agreed to settle the case by paying $58,307.07 in disgorgement and pre-judgment interest, plus a penalty of $10,000. He is also banned from working in the securities industry for two years, after which he will be able to re-apply to conduct business in the sector.
The SEC claimed BTCT Co had 7,959 registered accounts and had executed approximately 366,490 trades, while LTC Global had 2,655 accounts and processed around 60,496 trades. Further, 52 issuers entered into contracts to list their shares with LTC Global, while 69 issuers entered into contracts to list with BTCT Co.
The filing reads:
“None of the issuers registered a class of securities with the Commission under the Exchange Act, and none of the issuers registered an offering of securities with the Commission under the Securities Act.”
The issuers paid 11,450 LTC and 210 BTC in listing fees, respectively.
At the time LTC Global launched, 1 LTC was worth $0.02, compared to $3.62 at press time. When BTCT Co launched a few months later, the price of bitcoin was $12.56, a substantially lower price than the $365 observed today.
The SEC filing indicated that Burnside cooperated with its investigation, helping translate data and retaining financial audit experts to form reports.
“Burnside’s efforts facilitated the staff’s investigation involving an emerging technology,” the filing states.
Lawyers’ statement
Burnside was represented in the case by law firm Angeli Ungar Law Group[3] of Portland, Oregon, who put out a statement after the conclusion saying they and their client were pleased the SEC had approved the settlement.
That statement said Burnside had advised Angeli Ungar as soon as he learned of the investigation, and reiterated his intention to do everything possible to protect BTC Trading website users and to cooperate fully with the SEC.
“Throughout the investigation, Burnside fully cooperated with the Commission staff, providing early and substantial assistance. He made himself available to Commission staff upon request … and he retained financial audit experts to assist in the generation and formatting of reports in order to enable staff to quickly ascertain the scope and operation of his enterprises. Burnside’s efforts facilitated the staff’s investigation involving an emerging technology.”
Since the SEC investigation began, it added, bitcoin-based transactions have become increasingly prominent in the mainstream financial, political and regulatory conversation on virtual currencies. Burnside had “appreciated the opportunity” to share his understanding of bitcoin with the SEC despite the obvious challenge of the investigation.
Unregistered exchanges
According to the SEC filing[4], the two companies were “unregistered, online, virtual currency-denominated securities exchanges and broker-dealers” that sold and traded shares in digital currency companies using only bitcoin and litecoin.
BTC Trading Corp is registered in Belize, and is the owner of both LTC Global and BTCT Co, neither of which was an incorporated entity or registered with the SEC in any capacity.
Also mentioned was Burnside’s litecoin mining business LTC Mining, in which he sold shares between July and September 2012.
“Any individual or group was permitted to open an account and access the websites’ services after completing an online registration form. The only information required for registration was a valid email address, which allowed users of each website to maintain a certain level of anonymity. Registration was free. Once registered, users could view their account history and balance online,” he filing reads.
In addition, the filing accused Burnside of soliciting users of the Bitcoin Talk forum to enroll in the service.
Trial of action
The SEC has for some time now been pursuing[5] digital currency exchanges and investment platforms that have failed to register or comply with the Securities Exchange Act of 1934.
The agency suspended trading[6] of Imogo Mobile Technologies Corp in early 2014, and in a memorable email exchange[7] said it was investigating exchange MPEx owner Mircea Popescu over the sale of popular gambling site SatoshiDICE for over $11.5m in bitcoin.
An SEC investor alert[8] in May 2014 warned that bitcoin-based investments had a “heightened risk of fraud” and posed a risk[9] to inexperienced investors rushing to embrace cutting-edge technologies. A previous warning[10] cautioned investors of potential Ponzi schemes and other investment scams, while a separate bulletin[11] from the Financial Industry Regulatory Authority (FINRA) warned “Bitcoin: More than a Bit Risky”.
Even if investment platforms are not outright scams, the warnings suggested, their unlicensed nature mean their operators do not fulfill the strict disclosure, net worth or income requirements with which ‘traditional’ investment companies needed to comply in order to do business.
CoinDesk was unable to reach Burnside immediately for comment.
Trendon Shavers, a Texas man who ran a scam investment scheme called Bitcoin Savings and Trust, has been arrested in his home state.
The charges filed against Shavers today are one count of securities fraud and one of wire fraud.
Each charge has a maximum penalty of 20 years with potential fines totaling upwards of $5m.
Shavers, 32, has already been fined $40m by a federal judge in north Texas[1] in a Securities and Exchange Commission (SEC) -related case. This arrest is for criminal charges of fraud brought by the US Attorney in Manhattan.
Bitcoin Savings and Trust
By using the online monikers ‘Pirate’ and ‘pirateat40’, Shavers allegedly sold bitcoin investment opportunities on various online forums.
Calling his scheme Bitcoin Savings and Trust (BTCST), Shavers promised a 7% return per week to potential investors.
Shavers was able to amass over 700,000 BTC over a period of time stretching from September 2011 to September 2012, working on the scam from his home in McKinney, TX. The value of the bitcoin at the time of Shavers’ initial SEC charges was approximately $64m.
Shavers’ previous SEC case in North Texas created precedent when his attorney claimed bitcoin was not subject to US securities laws that prohibit Ponzi schemes. The judge in that case, however, ruled that the scam had indeed violated those laws, which are designed to protect investors from fraud.
Earlier this year, officials in Texas issued a warning in regards to virtual currencies. Joseph Rotunda, director of enforcement at the Texas State Securities Board, indicated that bitcoin has huge trust issues because of little regulatory clarity[3].
At today’s bitcoin prices[4], the roughly 700,000 BTC Shavers apparently scammed from investors would be worth $243m.
While the bitcoin economy is currently backed by $284m in venture capital and has a growing band of high-profile supporters, it still operates in a regulatory grey area in its largest market.
Unsurprisingly, just how the US will and should choose to regulate the digital currency is the subject of a continuing debate throughout all sectors of the ecosystem.
But, while the media focuses largely on policymakers like those currently making waves in New York[1], the country’s courts may yet prove to have a deciding influence on the legal future of bitcoin.
Last week Trendon Shavers made headlines when he was fined $40m for defrauding investors[2] in a bitcoin Ponzi scheme. The case, brought by the Securities and Exchange Commission (SEC) in July 2013, created a broad first precedent for bitcoin when the judge ruled that bitcoin is a currency[3] and a form of money.
Other cases could also have far reaching ramifications for the world of cryptocurrency. Below are the top court cases and rulings to date that are helping shape the US view on bitcoin.
SEC vs Trendon Shavers
Shavers, the operator of the Bitcoin Savings and Trust (BTCST)[4], came under fire in the case against the SEC for soliciting illicit investments in bitcoin-related opportunities from a number of lenders. In total, he fraudulently accumulated 700,000 BTC[5] in funds, an amount worth about $64m at the time of the arrest.
The ruling defied the March 2013 FinCEN guidance[6] declaration that bitcoin is not considered a currency under the Bank Secrecy Act as it is not legal tender.
“It is clear that bitcoin can be used as money. It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. […] it can also be exchanged for conventional currencies, such as the US dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”
The case also provided insight into how bitcoin-denominated damages may be assessed in the future, with the judge using the average daily price of bitcoin at the time the scheme was uncovered.
US vs Faiella
In August, US District Judge Jed Rakoff ruled that bitcoin is money during a case which sought to assess whether Charlie Shrem, CEO of defunct bitcoin exchange BitInstant, allegedly acted with Robert Faiella to supply bitcoins to Silk Road users.
The two were charged[8] with two counts of operating an unlicensed money transmitting business, one count of money laundering conspiracy and one count of willful failure to file a suspicious activity report.
Rakoff rejected Faiella’s reasoning[9] that bitcoins are not money and that his money transmission charges should therefore be cleared, saying:
“Money in ordinary parlance means ‘something generally accepted as a medium of exchange, a measure of value, or a means of payment’. Bitcoin clearly qualifies as ‘money’.”
Both defendants plead guilty to the charges, ultimately agreeing to pay nearly $1m in fines[10].
State of Florida vs Espinoza
Last month, the Bitcoin Foundation filed an amicus brief[11] in the case of Florida resident Pascal Reid, seeking to dismiss a money transmission charge.
In February, Reid and Michell Abner Espinoza were arrested in sting operations[12] in which they engaged in fake transactions with undercover agents through online marketplace LocalBitcoins.com and converted $30,000 of cash into bitcoin.
They were charged under Florida’s anti-money laundering law, which prohibits exchanges and business transactions over $10,000, and the unlicensed money transmission law, which permits currency or payment instruments to a maximum of $20,000 in a 12-month period.
The foundation believes that since the money transmission law applies specifically to corporations and entities qualified to do business in the state, Reid should be cleared of the charges. Further, as Florida is as yet undecided on how to regulate bitcoin, the state should not apply an “ambiguous criminal statute”.
The amicus brief allows the Bitcoin Foundation to help ensure a case outcome that sets favorable precedent for the broader bitcoin community, and does not mean that the organisation supports Reid directly.
Both defendants have filed to have the money laundering charges dismissed, invoking the Internal Revenue Service (IRS) guidance that bitcoin is not money[13].
US vs Ross William Ulbricht
The Ross Ulbricht[14] camp made a similar appeal in late March, citing flaws in the legal definition of money laundering.
Ulbricht is accused of heading the now-defunct online black market Silk Road. In February he was indicted on charges of computer hacking, drug trafficking, money laundering and engaging in a criminal enterprise.
Judge Katherine Forrest rejected the argument that bitcoin is not money, saying:
“Bitcoins carry value – that is their purpose and function – and act as a medium of exchange. Bitcoins may be exchanged for legal tender, be it US dollars, euros, or some other currency. Accordingly, [the defense’s] argument fails.”
Challenging the grounds that bitcoin doesn’t fall under the definition of legal money, she later wrote:
“There is no doubt that if a narcotics transaction was paid for in cash, which was later exchanged for gold, then converted back to cash, that would constitute a money laundering transaction. One can launder money using bitcoin.”
Ulbricht faces a series of new charges filed against him on 21st August, including narcotics trafficking, conspiracy to traffic fraudulent identification documents and distribution of narcotics by means of the Internet.
Ulbricht has pleaded not guilty on all charges. His trial is set for 3rd November.
