This August, Judge Amos Mazzant of the United States District Court of the Eastern District of Texas ruled in SEC v. Shavers that Bitcoins are a currency, and as such, they are subject to federal regulation.
Bitcoin, an algorithm-based electronic currency not backed by any real asset, can be bought and sold, and is often traded as an investment. Bitcoin can also be obtained by “mining” or performing complex mathematical equations to crack its code. For Bitcoin users and enthusiasts, the virtual currency has long been—at least functionally—real. Nonetheless, Judge Mazzant’s ruling may have far-reaching legal ramifications for Bitcoin users and businesses, from tax planning and securities regulation to intellectual property litigation.
In Shavers, the Securities Exchange Commission (SEC) charged Trendon Shavers with fraud for allegedly using his company Bitcoin Savings and Trust (BTCST) to swindle over $60 million in Bitcoin from unwitting investors in a “virtual” ponzi scheme. Shavers argued that because Bitcoin doesn’t meet the definition of money, the investments were not securities, and therefore not subject to federal regulation.
The court first cited to SEC v. W.J. Howey & Co. and Long v. Shultz Cattle Co. to define an investment contract as a contract, transaction, or scheme involving an investment of money in a common enterprise with the expectation of third-party-derived profits. Next, the court determined, in pertinent part, that the BTCST investments indeed constituted an investment of money. According to Judge Mazzant:
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. 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.
This ruling comes on the heels of a new set of Financial Crimes Enforcement Network guidelines, which define virtual currency exchanges as “money service businesses,” subject to attendant federal regulations. Shortly after, the U.S. government seized assets belonging to Mt. Gox, the leading Bitcoin exchange platform, for failing to register as a money exchange operation as required by 18 U.S.C. 1960. Mt. Gox promptly registered, skirting federal scrutiny. But Shavers may put Bitcoin users and traders back under the microscope, and not just by the feds.
Bitcoin-related patent applications were recently filed to stake claim to designs like paper wallets secure storage, physical coins, and bills conversion. Also, now that Bitcoin is officially a legal commodity, trading services and providers like Mt. Gox may be more vulnerable to claims of patent infringement. The technology for trading in virtual securities with virtual currency used by Wall Street is patented. Prior to Shavers, tech pundits scoffed at the notion that Wall Street would bother to take on traders of an unrecognized and unregulated currency. But that argument may now be moot. At least, virtually.