SEC Charges Bitcoin Savings and Trust (BTCST) as Ponzi Scheme

[samson]

Actually the Gizeh pyramids are not far from the city limits of Cairo as this picture shows:



It's not as if one would have to trek for hours to reach the pyramids as the usual desert side pics suggest.

That's not Cairo, that's Giza.

[tinus42]

Actually the Gizeh pyramids are not far from the city limits of Cairo as this picture shows:



It's not as if one would have to trek for hours to reach the pyramids as the usual desert side pics suggest.

That's not Cairo, that's Giza.

Well it's practically Cairo. Only several miles away. For tourists from countries like the USA the distance is negligable. When there was a mall shooting in Alphen aan den Rijn some years ago American media called the town "an Amsterdam suburb". Even though it's located about 20 miles away.

[Cyberdyne]

Isn't the MPEx model just another implementation of the SR model?

MPEx resembles SR on the server side (you don't get to know the IP).

But MPEx management operates more or less openly.  MP/PR are easier to find, or at least to identify, than DPR.

It's not as if MP takes great lenghts hiding his name and face:



Though why he would ride a horse instead of a camel in Egypt is a great mystery. 

A better question would be why he's wearing an ill-fitting 3 piece suit in the freaking desert.  Photoshop?

Or "Why does he not wear sunglasses when his eyes are clearly struggling to stay open?"

[tinus42]

Or "Why does he not wear sunglasses when his eyes are clearly struggling to stay open?"

Maybe he forgot to bring them. Or lost them. It makes the picture more plausible. Squinting is what people do in bright sunlight when they have no sunglasses or proper headcovering.

[MPOE-PR]

Rather than try to naunce some terms like "profit" why not look at SEC case against BTCST.  Pretending something is a "game" is not a defense.  If it looks like a duck, and quacks like a duck, the courts are going to find that it is a duck.

Which is precisely why the game currency Bitcoin is going to stay a game currency: that's what it damned well is. Can shake that "formalism" quote all the way to Sunday, this isn't a formal matter in the least. Reasons barring Bitcoin from being a currency in the legal sense are purely functional, quite numerous and absolutely irreconcilable through formalism.

a) The MtGox model. becomes licensed and regulated.

The MtGox model is running a pretend exchange that's more like a fractional reserve scam, lying everywhere and eventually going to jail. You need better research, seriously now. (Yes there's a massive volume of wrong stuff in your post, I'm just picking a couple cause I'm not getting paid enough for the whole thing.)

[DeathAndTaxes]

Which is precisely why the game currency Bitcoin is going to stay a game currency: that's what it damned well is. Can shake that "formalism" quote all the way to Sunday, this isn't a formal matter in the least. Reasons barring Bitcoin from being a currency in the legal sense are purely functional, quite numerous and absolutely irreconcilable through formalism.

"Game currency" is no defense.  First Circuit court has already ruled that virtual shares issues by virtual companies existing only in virtual stock exchange solely for the purported reason of being a game for entertainment to still be investments.  Might want to read up on SEC v. SG, Ltd. The first circuit saw right through the sham of "it is only a game".  What matters is the intent of the participants.  I think one would find it pretty trivial to convince a jury that the public at large viewed any "asset buying games" as what they are investments.  Hell this very sub forum would provide sufficient proof.  It is impossible for an objective person to read the securities forum and believe the intent isn't for profit and instead is solely as entertainment in a game.

From SEC vs SG Ltd.  
http://studentorgs.law.smu.edu/Science-and-Technology-Law-Review/Articles/Summer-2005/Tippett.aspx

SG argued that “the virtual shares were part of a fantasy investment game created for the personal entertainment of Internet users, and therefore, those shares do not implicate the federal securities laws.” 23 The SEC countered by stating that substance ought to prevail over form, and that merely labeling a website a game should not negate the applicability of the securities laws. 24The district court agreed with the defendant and granted the motion to dismiss, stating, “the virtual shares were a clearly marked and defined game, lacking a business context.”25 The SEC appealed immediately.26  This appeal hinged on whether the district court erred in ruling that transactions in the “privileged company’s” shares did not constitute transactions in securities as a matter of law. 27 The First Circuit looked to the definition of an investment contract as a security, as defined under the three pronged test set forth by the Supreme Court in Howey. 28After applying the elements of the Howeytest and rejecting the  rationale behind the district court’s decision, the First Circuit reversed the dismissal order and remanded the case for trial. 29 The district court had created a distinction between “commercial dealings” and “games,” finding that the former were covered by federal securities law and the latter were not. The First Circuit rejected such a distinction, noting that “as long as the three-pronged Howeytest is satisfied, the instrument must be classified as an investment contract.” 30 It is immaterial whether an instrument is labeled as a serious commercial venture or a game, as the securities acts were enacted to encompass virtually any instrument that might be sold as an investment. There is no categorical exception for games.31

As a personal note I disagree with the court's decision in SG for a number of reasons but to pretend that "it's isn't a security because .... game" is just naive and dishonest.  It isn't an open and shut case but intent matters.  When asset holders are listing real assets, generating real world profits, and passing those as dividends to shareholders, and you have this entire forum dedicated to analyzing various securities, their risks, potential profits, etc it would be pretty hard to convince a jury that this is all a game solely for entertainment.  By all accounts SG's operation was more like a casino then a true free market of assets and the courts still ruled against them. If SG Ltd failed in that defense then you honestly think other asset exchanges which have listings more bound to the real world then SG's "companies" which were totally fictional entities not having assets, cashflow, or profits will be more successful.  Maybe they will but they will need a defense a lot stronger than "it is a game currency. period.".

[MPOE-PR]

it is going to get interesting.  looking at the macro picture, this in reality is bad news for US growth.

from a commerce and growth perspective, the current US legal system is really holding back a lot on innovation in how business is done, so that the Federal govt can maintain relevance in a world where it will become less relevant

Indeed.

I doubt that it will take that long for AMC/VMC/AM/Ken Slaughter to get a visit from the folks with black suits and subpoenas.

The problem with this opinion is that it has no downside.

Science, contrary to this mechanism, works by creating propositions that are falsifiable, which is to say that can be proven wrong. Then they're tested, and usually proven wrong.

Propositions that can never be proven false are a waste of time, unless you're here to propose marriage to us or something.

Much of the reason no one has been prosecuted by the SEC up until now is because the SEC has never done it before.  Organizational inertia is a major factor in government.  Now that the path has been blazed

Hold your horses, they might overturn your armchair at this rate!

No path has been blazed, the SEC venue shopped for what they think is going to be an easy hick court to slip some stuff under the rug. Suppose it turns out they get ambushed and slaughtered there. Suppose they played right into the hands of superior strategists. What then?

Though why he would ride a horse instead of a camel in Egypt is indeed a great mystery.

MP sez: "Because horses I know how to ride. Camels not so much."

Or "Why does he not wear sunglasses when his eyes are clearly struggling to stay open?"

How often have you seen people on horseback with sunglasses on? Guess why not? Guess what the question says about you?

Maybe he forgot to bring them.

See above eh.

"Game currency" is no defense.  First Circuit court has already ruled that virtual shares issues by virtual companies existing only in virtual stock exchange solely for the purported reason of being a game for entertainment to still be investments.

That is an utter misrepresentation of the Stock Generation case, and a good illustration of why it's a good idea to actually hire counsel rather then rely on some sort of "enlightened diy" where you take the most scary construction possible on anything you half read. The salient point in that case was that while 19 of the 20 purported investments were presented as gambling by the operators, the 20th was in fact presented as an investment. The court did not challenge and in fact affirmed the absolute protection games have from being incorporated into reality. The court did not challenge and in fact affirmed the SEC's absolute domain to regulate such investments as are part of reality.

Of particular concern is that your caselist contains cases sorted in what appears to be a descending order of [Internet] fame rather than a descending order of relevance. This would be worrisome if you actually had anything to do with this entire thing called "Bitcoin in court".

Note before someone gets hung up on "money" as outlined in SEC complaint upthread many cases subsequent to Howey have affirmed that money is anything of value.  In prior cases even goods or services have met the first prong of the definition.  One such example was a ponzi scheme involving gold bullion instead of dollars.

Spare me the bullion, find one with Monopoly dollars in it. Or maple leaves. Or other such things of "value". Again: that the court is free of formalism works both ways. Substantially, Bitcoin is not money, and a formalist approach to value does not save the proposal to regulate every basketball card trading club in Punjab under the SEC.

PS. What's dishonest is to make a post and then delete it/substantially change it. If you don't trust yourself to express what you really think on any topic on the first pass, write everything on a notepad and post it a week later or whatever. I am responding to your original because it is a lot more informative than the weasely stuff you replaced it with. For the record, this is exactly how reputations are broken.

[freedomno1]

Once in a while I do enjoy a Trilema article good points it doesn't matter a damn what language we use its where the money is if the US wants to be bigots about it then the English speakers will move to Canada ha-ha.
The future of Bitcoin regulation.

[360SECONDS]

What do you think about the chances they will charge everything on BTCT as illigal investment offerings?

I think they are pretty good, actually.  From the attendant Investor Alert:

"the fraud may also involve an unregistered offering or trading platform"

and, here's the real kicker:

"Any investment in securities in the United states remains subject to the jurisdiction of the SEC regardless of whether the investment is made in U.S. dollars or a virtual currency. In particular, individuals selling investments are typically subject to federal or state licensing requirements."

I have, of course, counseled my clients on this point for some time.

Attention Unregistered Exchanges, Perpetual Mining Bonds (PMBs), REITs, and other members of the Bitcoin investment space: The SEC has explicitly indicated its intention to apply the already-existing laws to your security.  You may be selling securities in violation of the Securities Laws.

these clowns have a tuff enough time reasoning with forum fannies let alone when the real pigs come after them! (= lol

[360SECONDS]

A bit of advice for non-U.S. entities that have offered and dealt with the U.S. citizens:

Whatever you do make sure that you return to the investor at least the original nominal value of the investment. Or that you can return the original nominal value to all the investors.

As far as I know, in the history of S.E.C. there wasn't a case pursued or prosecuted that didn't involve at least a nominal loss of value (denominated in whatever units).

Please check out the recent case of SatoshiDice and its recent "sale to the undisclosed investors". It is a kind of "ultimate defense". Faced with limited resources S.E.C. (and others) will not spend the energy to pursue a case where there isn't a clear loss or wrongdoing to be shown.

If you are capable of returning the funds received from the U.S.-based investors you have nothing to worry besides a stern cease-and-desist letter from S.E.C. or your local government agency that cooperates with the S.E.C.

IANAL, but I ate many lunches with them.

dude bitcoin is anonymous dd game coin if you do it right there is zero connection and as long as you are preoared to lose all whats the big deal? =) ha

[crumbs]

...
Spare me the bullion, find one with Monopoly dollars in it. Or maple leaves. Or other such things of "value". Again: that the court is free of formalism works both ways. Substantially, Bitcoin is not money, and a formalist approach to value does not save the proposal to regulate every basketball card trading club in Punjab under the SEC.
...

Tcherepnin v. Knight, 389 U. S. 332, 389 U. S. 336 (1967) (in interpreting the term "security," "form should be disregarded for substance and the emphasis should be on economic reality"). Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.

Edit:  Today you're making the "PR" part seem like a real, tedious job.

[stslimited]

why are you guys collectively targeting the exchanges?

Why are MPOE and Burnside trying to justify their next move as if it matters for them.

ALL OF THE LIABILITY RESTS ON THE INDIVIDUALS AND COMPANIES IN AMERICA ISSUING SECURITIES.

So burnside, the fact you are running an exchange isn't the issue. It is the issuance of securities BY THOSE INDIVIDUAL COMPANIES, and thats not YOUR issue.


Burnside, you aren't the only exchange registered in a foreign country with servers (physical or cloud hosted) in the United States, chill out. I mean, if you run the pass through for BTC-Trading, then you need to address that

It has nothing to do with people playing your site's "game" or anything. The exchanges aren't the one exposed to liability, I mean unless you think you qualify as a broker (which you might, and might not)

I heard you were guys were talking to "a lawyer" but I think you'll still get some wrong FUD information, unless I just point these above things out.

This "game" talk is practically inviting the SEC to make an example out of someone.

[burnside]

Which is precisely why the game currency Bitcoin is going to stay a game currency: that's what it damned well is. Can shake that "formalism" quote all the way to Sunday, this isn't a formal matter in the least. Reasons barring Bitcoin from being a currency in the legal sense are purely functional, quite numerous and absolutely irreconcilable through formalism.

"Game currency" is no defense.  First Circuit court has already ruled that virtual shares issues by virtual companies existing only in virtual stock exchange solely for the purported reason of being a game for entertainment to still be investments.  Might want to read up on SEC v. SG, Ltd. The first circuit saw right through the sham of "it is only a game".  What matters is the intent of the participants.  I think one would find it pretty trivial to convince a jury that the public at large viewed any "asset buying games" as what they are investments.  Hell this very sub forum would provide sufficient proof.  It is impossible for an objective person to read the securities forum and believe the intent isn't for profit and instead is solely as entertainment in a game.

From SEC vs SG Ltd.  
http://studentorgs.law.smu.edu/Science-and-Technology-Law-Review/Articles/Summer-2005/Tippett.aspx

SG argued that “the virtual shares were part of a fantasy investment game created for the personal entertainment of Internet users, and therefore, those shares do not implicate the federal securities laws.” 23 The SEC countered by stating that substance ought to prevail over form, and that merely labeling a website a game should not negate the applicability of the securities laws. 24The district court agreed with the defendant and granted the motion to dismiss, stating, “the virtual shares were a clearly marked and defined game, lacking a business context.”25 The SEC appealed immediately.26  This appeal hinged on whether the district court erred in ruling that transactions in the “privileged company’s” shares did not constitute transactions in securities as a matter of law. 27 The First Circuit looked to the definition of an investment contract as a security, as defined under the three pronged test set forth by the Supreme Court in Howey. 28After applying the elements of the Howeytest and rejecting the  rationale behind the district court’s decision, the First Circuit reversed the dismissal order and remanded the case for trial. 29 The district court had created a distinction between “commercial dealings” and “games,” finding that the former were covered by federal securities law and the latter were not. The First Circuit rejected such a distinction, noting that “as long as the three-pronged Howeytest is satisfied, the instrument must be classified as an investment contract.” 30 It is immaterial whether an instrument is labeled as a serious commercial venture or a game, as the securities acts were enacted to encompass virtually any instrument that might be sold as an investment. There is no categorical exception for games.31

As a personal note I disagree with the court's decision in SG for a number of reasons but to pretend that "it's isn't a security because .... game" is just naive and dishonest.  It isn't an open and shut case but intent matters.  When asset holders are listing real assets, generating real world profits, and passing those as dividends to shareholders, and you have this entire forum dedicated to analyzing various securities, their risks, potential profits, etc it would be pretty hard to convince a jury that this is all a game solely for entertainment.  By all accounts SG's operation was more like a casino then a true free market of assets and the courts still ruled against them. If SG Ltd failed in that defense then you honestly think other asset exchanges which have listings more bound to the real world then SG's "companies" which were totally fictional entities not having assets, cashflow, or profits will be more successful.  Maybe they will but they will need a defense a lot stronger than "it is a game currency. period.".

I read through the entire article.  There are many parallels to where we are today.

Ultimately however, they were in court because they committed fraud using USD, making promises that they could not keep.  Read the "Operation" section on the page here: http://en.wikipedia.org/wiki/Stock_Generation  ... They basically outright stole people's USD.

- BTC-TC does not steal USD or BTC in ANY way, shape, or form.
- BTC-TC does not commit fraud.  (though the issuers might!)
- BTC-TC makes NO promises of guaranteed returns.  
- With the exception of the LTC-GLOBAL shares, which are BTC Trading Corp's liability, the Howey test does not apply to the exchange directly, it applies to the issuers using the exchange.

The first prong of the Howey test may or may not apply to bitcoin.  (is bitcoin "money"?  in Australia and many parts of the world it explicitly IS NOT.  In the US it has not been decided in court, but FinCEN is saying they consider it money and it will thus end up in court sooner rather than later.)

Subsequent prongs of the Howey test almost certainly apply.



It's been a day or so since I've posted in here and some may be wondering where BTC-TC stands with things.

- BTC-TC will not be closing it's doors to US citizens.  US citizens using the site are not doing anything wrong and the issues around investing in assets from the various issuers is better addressed on a per-issuer basis.  For instance, a fully registered and compliant issuer should be able to have unfettered access to the entire US population, whereas an issuer that has not properly registered their company puts themselves at risk and thus we would hope would close off access to the riskier markets.  (note that this registration takes many forms depending on where you are located.)
- BTC-TC will be adapting it's ToS and wording on the site to be clearer and to avoid words that imply regulation where there is not.  For example, calling something a stock implies a share of a regulated, registered company, when in fact that may not truly be the case.  These changes will be made over time as we work things out with the help of legal representation.
- BTC-TC will be building a set of tools to assist issuers in maintaining compliance with securities law internationally.  Initially this means that we will be giving issuers the ability to solicit (or not solicit) investment on a per-country basis.  Eventually we could also facilitate validation and filtering of accredited investors versus non-accredited investors.

Cheers.

[stslimited]

Which is precisely why the game currency Bitcoin is going to stay a game currency: that's what it damned well is. Can shake that "formalism" quote all the way to Sunday, this isn't a formal matter in the least. Reasons barring Bitcoin from being a currency in the legal sense are purely functional, quite numerous and absolutely irreconcilable through formalism.

"Game currency" is no defense.  First Circuit court has already ruled that virtual shares issues by virtual companies existing only in virtual stock exchange solely for the purported reason of being a game for entertainment to still be investments.  Might want to read up on SEC v. SG, Ltd. The first circuit saw right through the sham of "it is only a game".  What matters is the intent of the participants.  I think one would find it pretty trivial to convince a jury that the public at large viewed any "asset buying games" as what they are investments.  Hell this very sub forum would provide sufficient proof.  It is impossible for an objective person to read the securities forum and believe the intent isn't for profit and instead is solely as entertainment in a game.

From SEC vs SG Ltd.  
http://studentorgs.law.smu.edu/Science-and-Technology-Law-Review/Articles/Summer-2005/Tippett.aspx

SG argued that “the virtual shares were part of a fantasy investment game created for the personal entertainment of Internet users, and therefore, those shares do not implicate the federal securities laws.” 23 The SEC countered by stating that substance ought to prevail over form, and that merely labeling a website a game should not negate the applicability of the securities laws. 24The district court agreed with the defendant and granted the motion to dismiss, stating, “the virtual shares were a clearly marked and defined game, lacking a business context.”25 The SEC appealed immediately.26  This appeal hinged on whether the district court erred in ruling that transactions in the “privileged company’s” shares did not constitute transactions in securities as a matter of law. 27 The First Circuit looked to the definition of an investment contract as a security, as defined under the three pronged test set forth by the Supreme Court in Howey. 28After applying the elements of the Howeytest and rejecting the  rationale behind the district court’s decision, the First Circuit reversed the dismissal order and remanded the case for trial. 29 The district court had created a distinction between “commercial dealings” and “games,” finding that the former were covered by federal securities law and the latter were not. The First Circuit rejected such a distinction, noting that “as long as the three-pronged Howeytest is satisfied, the instrument must be classified as an investment contract.” 30 It is immaterial whether an instrument is labeled as a serious commercial venture or a game, as the securities acts were enacted to encompass virtually any instrument that might be sold as an investment. There is no categorical exception for games.31

As a personal note I disagree with the court's decision in SG for a number of reasons but to pretend that "it's isn't a security because .... game" is just naive and dishonest.  It isn't an open and shut case but intent matters.  When asset holders are listing real assets, generating real world profits, and passing those as dividends to shareholders, and you have this entire forum dedicated to analyzing various securities, their risks, potential profits, etc it would be pretty hard to convince a jury that this is all a game solely for entertainment.  By all accounts SG's operation was more like a casino then a true free market of assets and the courts still ruled against them. If SG Ltd failed in that defense then you honestly think other asset exchanges which have listings more bound to the real world then SG's "companies" which were totally fictional entities not having assets, cashflow, or profits will be more successful.  Maybe they will but they will need a defense a lot stronger than "it is a game currency. period.".

I read through the entire article.  There are many parallels to where we are today.

Ultimately however, they were in court because they committed fraud using USD, making promises that they could not keep.  Read the "Operation" section on the page here: http://en.wikipedia.org/wiki/Stock_Generation  ... They basically outright stole people's USD.

- BTC-TC does not steal USD or BTC in ANY way, shape, or form.
- BTC-TC does not commit fraud.  (though the issuers might!)
- BTC-TC makes NO promises of guaranteed returns.  
- With the exception of the LTC-GLOBAL shares, which are BTC Trading Corp's liability, the Howey test does not apply to the exchange directly, it applies to the issuers using the exchange.

The first prong of the Howey test may or may not apply to bitcoin.  (is bitcoin "money"?  in Australia and many parts of the world it explicitly IS NOT.  In the US it has not been decided in court, but FinCEN is saying they consider it money and it will thus end up in court sooner rather than later.)

Subsequent prongs of the Howey test almost certainly apply.



It's been a day or so since I've posted in here and some may be wondering where BTC-TC stands with things.

- BTC-TC will not be closing it's doors to US citizens.  US citizens using the site are not doing anything wrong and the issues around investing in assets from the various issuers is better addressed on a per-issuer basis.  For instance, a fully registered and compliant issuer should be able to have unfettered access to the entire US population, whereas an issuer that has not properly registered their company puts themselves at risk and thus we would hope would close off access to the riskier markets.  (note that this registration takes many forms depending on where you are located.)
- BTC-TC will be adapting it's ToS and wording on the site to be clearer and to avoid words that imply regulation where there is not.  For example, calling something a stock implies a share of a regulated, registered company, when in fact that may not truly be the case.  These changes will be made over time as we work things out with the help of legal representation.
- BTC-TC will be building a set of tools to assist issuers in maintaining compliance with securities law internationally.  Initially this means that we will be giving issuers the ability to solicit (or not solicit) investment on a per-country basis.  Eventually we could also facilitate validation and filtering of accredited investors versus non-accredited investors.

Cheers.

great news: these features would make your exchange the most evolved exchange in the world, and the most advanced and accessible solution for raising capital

[AngelSky]

great news: these features would make your exchange the most evolved exchange in the world, and the most advanced and accessible solution for raising capital

Nice to see some people seeing further.

[Cyberdyne]

Or "Why does he not wear sunglasses when his eyes are clearly struggling to stay open?"

How often have you seen people on horseback with sunglasses on? Guess why not? Guess what the question says about you?

I have no idea what you're talking about. Do you just type random words and then go back later and see if they make sense or not?

[MPOE-PR]

I have no idea what I'm talking about so here's a pic of a mare riding it out.

Right.

[Lohoris]

For the lulz, linking Yahoo answers! Can I wear sunglasses while horseback riding?

[MPOE-PR]

For the lulz, linking Yahoo answers! Can I wear sunglasses while horseback riding?

Lol okay.

But seriously, apparently it's a significant injury risk. Or mebbe MP is just being conservative, in the XIXth century sense of the term.

[freedomno1]

For the lulz, linking Yahoo answers! Can I wear sunglasses while horseback riding?

Lol okay.

But seriously, apparently it's a significant injury risk. Or mebbe MP is just being conservative, in the XIXth century sense of the term.

Would have went with a cowboy hat on