Bitcoin is Money, says Federal Court

[MSantori]

A Federal Court yesterday agreed with the SEC, holding that, for the purposes of the definition of a security, Bitcoin is money:

The SEC argues that the BTCST investments are both investment contracts and notes, and, thus, are securities.

The term “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). First, the Court must determine whether the BTCST investments constitute an investment of money. 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. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.

I don't think anyone should be surprised by this.  Of course an investment denominated in BTC is still an investment. No surprise there.  Unfortunately, this will have consequences far beyond the securities laws, and will spill into the payments sector.  It is precedent, and regulators will likely refer to this opinion, and those following it, to support their regulation of bitcoin as a transmission of money.

TL;DR: Bitcoin is money now, for the purposes of the securities laws.  MSB/MTB regulators will also likely rely on this opinion to support their regulation of Bitcoin activity in their jurisdiction, too.

http://www.courthousenews.com/2013/08/06/Bitcoin.pdf

[1714035841]

1714035841

[BCB]

http://www.courthousenews.com/2013/08/06/Bitcoin.pdf

United States District Court
EASTERN DISTRICT OF TEXAS
SHERMAN DIVISION
SECURITIES AND EXCHANGE §
COMMISSION §
§
V. § CASE NO. 4:13-CV-416
§
TRENDON T. SHAVERS and BITCOIN §
SAVINGS AND TRUST §
MEMORANDUM OPINION REGARDING THE COURT’S
SUBJECT MATTER JURISDICTION

[MSantori]

Neglected to post the link!

[BBazaar]

Bitcoin was already deemed money when FINCEN started requiring MSB filings.

The interesting part of this ruling is that all the complex products out there that are derived from bitcoin will now be under regulation by the SEC.  Companies like ASICminer with public exchanges of their shares paying out dividends will now be subject to SEC regulations.  The exchanges allow for these securites to trade will now also have rules and regulations to comply with.  Any sites offering CD's or notes that pay interest will also have to pay close attention to the regulations they fall under.

I can see the argument being made that perhaps these securites are offered and solicited on the web in countries outside the SEC's jurisdiction, but any US based site or service will absolutely need to reassess whether or not they are complying with regulations.

Very interesting indeed.

[BCB]

Very interesting.

Thanks for the clarification.

[MSantori]

Bitcoin was already deemed money when FINCEN started requiring MSB filings.

The interesting part of this ruling is that all the complex products out there that are derived from bitcoin will now be under regulation by the SEC.  Companies like ASICminer with public exchanges of their shares paying out dividends will now be subject to SEC regulations.  The exchanges allow for these securites to trade will now also have rules and regulations to comply with.  Any sites offering CD's or notes that pay interest will also have to pay close attention to the regulations they fall under.

I can see the argument being made that perhaps these securites are offered and solicited on the web in countries outside the SEC's jurisdiction, but any US based site or service will absolutely need to reassess whether or not they are complying with regulations.

Very interesting indeed.

I agree with all of this, except for the first part.  The FinCEN guidance absolutely, categorically did not say that Bitcoin was money. Hence the gravity of this development.

[Bitware]

My taxing authority just told me Bitcoin is not money, and they will not accept it.

[BCB]

My taxing authority just told me Bitcoin is not money, and they will not accept it.

Standby for an update on that.  The IRS evidently only just learned about bitcoin in May of 2013.

http://www.gao.gov/assets/660/654620.pdf

[Stephen Gornick]

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.

I pull up to my grocery store with a couple garbage bags of aluminum cans and get a receipt. I then go into the store and purchase goods and services.  I can also cash it out to dollars.   I could even trade that receipt with someone else for cash and they can then go into the store to purchase goods and services, or get cash out.

So if I ran an investment "fund" where you send me 100 aluminum cans and I promise to deliver 107 cans back to you in a week, all of a sudden aluminum cans become securities [Edit: money] too?    I'm hoping so, as that will make me feel less guilty each time I pick up a 6-pack of beer on the way home -- it's an investment! [Edit: simply my way of changing my asset allocations to diversify the forms of money I may hold].

But I'm presuming the form of value is irrelevant (whether it be gold, bitcoins or beanie babies) and instead the matter entirely has to do with the offering where there is the expectation for profit.

[DeathAndTaxes]

The FinCEN guidance absolutely, categorically did not say that Bitcoin was money. Hence the gravity of this development.

This is a very important point likely lost in the telephone game of people generalizing statement and removing context after the FinCEN announcement.

FinCEN by virtue of the BSA have very wide (I would argue maybe too wide) authority to regulate far more than just transactions involving "money".  A simplified, definition (which shouldn't be relied upon for legal purposes) is that FinCEN regulates the transfer of value.  FinCEN never said Bitcoin is money (and never said it wasn't), they didn't even say it was "currency".  Instead in the guidance they relegated it to the term "virtual currency", which doesn't exist in any relevant statute.  FinCEN's guidance was that the exchange of virtual currencies for real currencies (and vice versa) as well as the exchange of one virtual currency for another (aka "being an exchanger") constitutes money transfer.  Depsite the word money in the name, money transfers involve a lot more than just money.

FinCEN's regulations define the term "money transmitter" as a person that provides money transmission services, or any other person engaged in the transfer of funds. The term "money transmission services" means "the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.  The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.

As best one could make the statement that FinCEN said "Bitcoin is a value that substitutes for currency".  As you point out this was incorrectly simplified to "Bitcoin is money" but was never correct until today.

[DeathAndTaxes]

I pull up to my grocery store with a couple garbage bags of aluminum cans and get a receipt. I then go into the store and purchase goods and services.   I could even trade that receipt with someone else for cash and they can then go into the store to purchase goods and services.

So if I ran an investment "fund" where you send me 100 aluminum cans and I promise to deliver 107 cans back to you in a week, all of a sudden aluminum cans become securities too?    I'm hoping so, as that will make me feel less guilty each time I pick up a 6-pack of beer on the way home -- it's an investment!

Well to be clear (and it may just be a typo in your example) the courts never said Bitcoins are an investments/securities merely that an investment/security involving Bitcoins is still an investment/security if it otherwise meets the criteria for a investment/security.  
In your example aluminum cans wouldn't be an investment/security however it is possible that some future court could rule that a ponzi scheme which involved cans to still be an illegal investment/security.

In short the prosecution still needs to prove (and it is painfully easy in this case) that a particular transaction is a security and an illegal one at that.  The ruling by the judge simply means that the (always weak and unsupported) defense of "oh this thing it isn't a security because ... Bitcoin" has no legal merit.

But I'm presuming the form of value is irrelevant (whether it be gold, bitcoins or beanie babies) and instead the matter entirely has to do with the offering where there is the expectation for profit.

Exactly.  A good layman test would be for someone to replace bitcoin (or gold or aluminum cans) with USD in a hypothetical transaction.  Would the courts rule the USD transaction a security?  If so then they likely will rule the Bitcoin one a security as well.

Imagine the scenario was:

Mr. Shavers offered a scheme where investors deposited USD to Mr. Shaver and received 7% per week in interest.  While Mr. Shaver's claimed to be running a business which generated sufficient returns to pay that level of interest, in actuality he used the deposits of later investors to pay the interests and withdrawals of prior investors.  The operation had no real source of revenue.  The state filed for civil action against Mr. Shaver on the grounds that he operated an illegal ponzi scheme and an offered an unlicensed security (that did not meet any exemption from licensing in US securities law).

In this example nobody would argue that it was anything other than a ponzi scheme and illegal security.  Until today some have had the belief that merely changing USD for BTC made it magically not a security or if a ponzi outside the jurisdiction of regulators.  The "because Bitcoin" defense.

The court hasn't even ruled that Mr. Shavers has operated a ponzi scheme or illegal security at this point (although it would appear to be a slam dunk case so it is an inevitability).  For a judge to rule that, the prosecution still needs to prove that a ponzi scheme existed and that the transactions in question were part of an unlicensed security. The judge is merley saying a defense of "because Bitcoin" has no legal merit.  It never did some people simply took a lack of legal action to mean legal action wasn't possible.

[Stephen Gornick]

Well to be clear (and it may just be a typo in your example)

Yup, I've now corrected that.
In reading the court's memorandum, I see the relevant part:

An investment contract is any contract, transaction, or scheme involving (1) an investment of money,

then
The term “security” includes any "investment contract”.

So the linkage is that 1.)  bitcoin can be used as money,  2.) Shaver's "scheme" involved investment of this particular form of money and is thus an investment contract, 3.) investment contracts are securities.

  - http://ia800904.us.archive.org/35/items/gov.uscourts.txed.146063/gov.uscourts.txed.146063.23.0.pdf

I'm wondering if launching a beanie baby ponzi would have yielded the same response from the feds.

[DeathAndTaxes]

I'm wondering if launching a beanie baby ponzi would have yielded the same response from the feds.

My guess is it wouldn't simply because the BB ponzi would have very high friction and thus would be unattractive to most victims.  Also while one can buy and sell BB, I have not seen any merchants accepting BB as payment for other goods and services so making the claim they are "money" would be difficult.  Although the need for money is not absolute.  I can't remember the case but there is precedent for "money" in the securities requirement to include more than what most would consider "money".  The courts are going to look more broadly at value and liquidity.  If the payment is in something that has value and there is liquid market to exchange the asset for conventional money or goods/services it likely meets the definition of "money" for this statute.  Maybe I can find the cite of the previous case.

The small scale, and difficulty in proving the statutory definition likely means any BB ponzi would just be off the radar of regulators.  It probably wouldn't be legal (or at the very least would be on real shaking legal ground) but you might not be prosecuted.

[pacojones]

Thanks for the link - this is a big step to bitcoin being widely accepted (I just hope it's in the right direction!).

[boomerlu]

A lot of the SEC rules are hopelessly obsolete for the purposes of Bitcoin investments (many of them are obsolete for the current US Equities market!). Also, there is the FINRA angle? Maybe?

MSantori, is there anything further that you can offer about the consequences of this with respect to established securities law? Possible exemptions? I know it's a very broad question, but I'm sure it's on everybody's minds.

ie, will one have to be a registered Broker-Dealer just to trade in BTC securities? Series 7/63/55? It just seems ridiculous, the model is entirely different in BTC securities (everybody is a member of the exchange) vs cash equities (exclusive set of members, who act as brokers for the public).

[BBazaar]

The FinCEN guidance absolutely, categorically did not say that Bitcoin was money. Hence the gravity of this development.

This is a very important point likely lost in the telephone game of people generalizing statement and removing context after the FinCEN announcement.

FinCEN by virtue of the BSA have very wide (I would argue maybe too wide) authority to regulate far more than transactions involving money.  A simplified non-legal definition is that FinCEN regulates the transfer of value.  FinCEN never said Bitcoin is money, they didn't even say it is a "currency" instead relegating in their guidance to the term "virtual currency" (which doesn't appear in any statute).  FinCEN merely said that the exchange of virtual currencies for real currencies (and vice versa) as well as the exchange of one virtual currency for another (aka "being an exchanger") constitutes money transfer.  Depsite the word money in the name, money transfers involve a lot more than just money.

As you point out this was incorrectly simplified to "Bitcoin is money" but was never correct until today.

I agree they tiptoed around the word Money and even plain Currency.  It was certainly implied and the direction was clear.

Next question is when will dividends from companies like ASIC Miner require a 1099-DIV!

[marcus_of_augustus]

So bitcoin is money but gold is not money? 

http://www.youtube.com/watch?v=OghDOApA-1k Federal Reserve chairman bernank

Maybe the judge should ask bernanke if bitcoin is money?

yeah, ok, uh-huh ... anyway, I'm not so sure federal judges in US have much credibility left do they?

http://en.wikipedia.org/wiki/Colleen_Kollar-Kotelly

On July 14, 2004, barely two months after President Bush was forced to end NSA domestic internet metadata collection by Attorney General John Ashcroft, Kollar-Kotelly issued a FISA court order allowing the NSA to resume unconstitutional[2] domestic internet metadata collection.[3]

[DeathAndTaxes]

So bitcoin is money but gold is not money?  

http://www.youtube.com/watch?v=OghDOApA-1k Federal Reserve chairman bernank

Find a court precedent saying that and you might have something.  Ben Bernkake's comments are just that comments, they aren't the "law of the land" anywhere on the planet.

[kjj]

Posted in a different thread, but I see a lot of the same questions here, so cross posting...

Black's defines money as anything used as money, and currency as the subset of money that has been authorized by law.  The is different from conventional usage which holds the two terms to be synonyms, only weakly defined.

The judge in this case is clearly using the two words interchangeably, consistent with conversational English, and clearly also in the very broad definition that Black held for money.

It is clear that Bitcoin can be used as money.  [...]  The only limitation of Bitcoin is that it is limited to those places that accept it as currency.

If BTCST had traded in gold coins I would expect pretty much the same ruling.  For that matter, if there was a community that used sheep as money, and he had run this scam on them, I'd fully expect the judge to interpret the "investment of money" fork of the Howey test through the victim's eyes and issue the same ruling.

Lawyers have an ethical duty to try every possible defense, so this question was inevitable.  Of course, the answer was just as inevitable, as some of us have been saying for the last few years now.  Courts mostly operate on value, and most of the value that they see is not granted by the decree of some authority, but by the perceptions of the parties involved.

Let all of the scammers be on notice.  Your defense is now solely in your ability to keep your scams small enough that it isn't worth hunting you down.  Your claims that it wasn't really theft/fraud/whatever because bitcoins aren't issued by the government will fall on deaf ears, and some of you are going to end up in prison.

[marcus_of_augustus]

So bitcoin is money but gold is not money?  

http://www.youtube.com/watch?v=OghDOApA-1k Federal Reserve chairman bernank

Find a court precedent saying that and you might have something.  Ben Bernkake's comments are just that comments, they aren't the "law of the land" anywhere on the planet.

Wrong, more than "just comments" ... it was congressional testimony by chairman of the federal reserve, in response to a tabled question from the chairman of the senate banking committee.

So next to supreme court, senate testimony is akin to the next highest court in the land ... unfortunately senators have crapped all over that status for so long now it has as much standing now as judge judy and jerry springer re-runs ... dyodd.