Much more work needs to be done here to describe the securities law implications of complementary currency transactions. One recent case held that the Securities Exchange Commission had subject matter jurisdiction over a case involving the investment of Bitcoin. This case is not particularly surprising or groundbreaking, but we have have summarized it below.
Treatment of Certain Virtual Currency Transactions as Securities
In SEC v. Shavers, the US District Court for the Eastern District of Texas found that certain types of virtual currency transactions constituted securities, and thus that the SEC had jurisdiction to regulate such transactions.
The plaintiff in the case, Trendon Shavers, is the founder and operator of Bitcoin Savings and Trust (BTCST), a Texas-based business that began advertising that he was in the business of “selling Bitcoin to a group of local people,” and offering Bitcoin investors up to 1% daily interest on their investments. In other words, Bitcoin holders invested Bitcoin in BTCST, which promised a return on their Bitcoin investment through the sale of Bitcoin to third party purchasers.
Shavers argued that Bitcoin are not securities as defined by the Federal Securities Act since Bitcoin is not money and no money ever changed hands in the Bitcoin transactions. The SEC argued that the investments in Bitcoin offered by BTCST are both investment contracts and notes, and thus securities.
A “security” is defined as “any note, stock, treasury stock, security future, security-based swap, bond…[or] investment contract…” 15 U.S.C. § 77b. An “investment contract” is any contract, transaction, or scheme involving (1) an investment of money, (2) in a common enterprise, (3) with the expectation that profits will be derived from the efforts of the promoter or a third party. SEC v. W.J. Howey & Co., 328 U.S. 293, 298-99 (1946); Long v. Shultz Cattle Co, 881 F.2d 129, 132 (1989).
Based on these definitions, the court found that:
(1) 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. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. 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.”
(2) A business based on trading and exchanging Bitcoin is a “common enterprise.” This can be demonstrated “by the investors’ collective reliance on the promotor’s expertise even where the promotor receives only a flat fee or commission rather than a share in the profits of the venture.” Long, 881 F.2d at 141. Investors in BTCST were found to be reliant on Shavers’ expertise in Bitcoin markets and his local connections. Furthermore, Shavers allegedly promised a substantial return on investment based on his trading and exchanging of Bitcoin. Thus, the court found this was a “common enterprise.”
(3) Shavers’ advertisement of Bitcoin investments created an expectation of deriving profits from the efforts of a third party. His alleged promises of up to 1% daily interest on investments clearly created this expectation.
What is significant about this ruling for virtual currency users is that certain types of virtual currency transactions can be considered securities, not that all transactions will be considered securities. The court also found that, at least in an investment context, Bitcoin is recognized as money since it can be used to purchase goods and services and it can be exchanged for other forms of legal tender.