Author: Dan Stroh, Associate Member, University of Cincinnati Law Review
The Securities and Exchange Commission (SEC) took a bold step in the regulation of virtual currencies on July 23, 2013, when it charged Trendon Shavers and his company, Bitcoin Savings and Trust (BTCST), with defrauding customers in a Ponzi scheme. The defense offered by Shavers in the motions leading up to the judgment was that bitcoin is not a real currency or money recognized by the U.S. government. Because securities fraud law requires an “investment of money” to form an investment contract, Shavers argued that because the SEC could not show this investment, the statutes did not apply to Bitcoin and the SEC’s prosecution must be dismissed. However, on September 18, 2014, a Texas court granted the SEC’s motion for summary judgment on the violations of anti-fraud and registration provisions of several securities laws and imposed fines of over $40 million on Shavers and BTCST. Because Shavers admitted most of the factual basis of the SEC’s argument, once the court held that an investment contract existed, he had no defense to the charges. This ruling was one of the first to determine the status of bitcoin as a security in a United States court. Although Bitcoin may be a newcomer to the securities industry, defining bitcoin as a security gives regulators at the SEC significant and necessary power to combat fraud in this developing area of finance.