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US Federal Judge Rules Bitcoins Are “A Form Of Money”, Can Be Regulated

Max 'Beast from the East' Smolaks covers open source, public sector, startups and technology of the future at TechWeekEurope. If you find him looking lost on the streets of London, feed him coffee and sugar.

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Securities and Exchange Commission gets a green light to investigate Bitcoin companies

A federal judge has ruled that Bitcoins (BTC) are a form of money and can be regulated by the authorities, while establishing whether Bitcoin Savings and Trust (BTCST), formerly known as First Pirate Savings and Trust, falls under the jurisdiction of the US Securities and Exchange Commission (SEC).

The SEC is accusing Trendon Shavers from McKinney, Texas, of running BTCST – a massive Ponzi scheme which defrauded investors of 263,104 BTC in 2011 and 2012, worth $1,834,303 at the time. Today, this amount of Bitcoins would be worth more than $23 million (£14.8m).

Federal investigators said this was the first Ponzi scheme they have uncovered that involves Bitcoins. Shavers previously claimed that BTC wasn’t a currency, meaning the case couldn’t be investigated by SEC.

A question of terminology

Bitcoins are a digital currency based on an open-source, peer-to-peer Internet protocol, first introduced in 2009 by an anonymous developer known under the alias ‘Satoshi Nakamoto’. Bitcoins cannot be traced, and their ownership cannot be established. This has led to their popularity among certain Internet subcultures, anarchists and even real-world criminals. Recently, a number of major online businesses have started to accept BTC as a form of payment, improving its reputation.

Bitcoin (c) virtualmage, ShutterstockIn November of 2011, Shavers established First Pirate Savings and Trust, claiming that he was “selling Bitcoin to a group of local people” and offering investors up to one percent interest daily. This simple story enabled him to amass 700,467 BTC, worth around $4,592,806 (£2.95m) at the time. According to the court, at some point during the relevant period the interest promised was as high as 3.9 percent.

SEC says that in a typical Ponzi scheme fashion, BTCST used Bitcoins contributed by new investors to make purported interest payments and cover withdrawals on outstanding investments. The service shut down in August 2012, with the founder subsequently arrested.

“Fraudsters are not beyond the reach of the SEC just because they use Bitcoins or another virtual currency to mislead investors and violate the federal securities laws,” Andrew Calamari, director of the SEC’s New York Regional Office, said in a statement last month.

In his defence, Shavers argued that BTCST investments weren’t securities as defined by the Federal Securities Laws because Bitcoin isn’t “money”, so it can’t be regulated by the authorities. SEC responded by saying that the BTCST investments fell under the definition of securities, and now this point of view has been confirmed by the court.

“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 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,” wrote Judge Amos Mazzant in a memorandum opinion.

Last month, Patrick Murk, general counsel at the Bitcoin Foundation, told the Bitcoin London conference that recent attention of US regulators had made BTC more “legitimate”, and called it a “watershed moment” for the industry. He also acknowledged that additional regulation would make running a BTC business that much harder.

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