The Securities and Exchange Commission is stepping up its policing of the Bitcoin ecosystem. A few weeks after warning against investing in the digital currency, the agency has fined SatoshiDICE and FeedZeBirds founder Eric Voorhees more than $50,000 for selling equity in those companies to unregistered investors. (He is repaying the almost $16,000 in profits he made from those sales as well as a $35,000 fine levied as part of the settlement.)
Bitcoin might have been made to help people avoid groups just like the SEC, but the agency wants everyone to know that it can still affect the digital financial world and the people who are trying to cash in on this latest gold rush.
Voorhees’ problem was that he advertised the sale of equity in SatoshiDICE and FeedZeBirds via social media, solicited funds in Bitcoin, and allowed anyone to buy in to the companies. That’s illegal when people are trying to sell equity in their startups to unregistered investors in exchange for the good ol’ American dollar, and it’s just as illegal when it’s done for Bitcoin. As Andrew Ceresney, the head of the SEC’s Division of Enforcement, explained in a press release:
All issuers selling securities to the public must comply with the registration provisions of the securities laws, including issuers who seek to raise funds using Bitcoin. We will continue to focus on enforcing our rules and regulations as they apply to digital currencies.
Bitcoin is an ideal candidate for sales to unregistered investors. The currency tends to attract people who don’t want the government having anything to do with their financial activity, and its most vocal supporters are convinced that it should remain free from such control. It also allows for various degrees of pseudo-anonymity depending on the platform and transaction type.
Offering equity in companies founded specifically for the currency to anyone who wants to purchase it is a natural extension of the Bitcoin community’s “fuck the regulators” view of the world – a veiw that has been changing slowly but surely as the crypto-currency becomes more mainstream. But, as Voorhees’ settlement shows, those anti-establishment ideals won’t stop the SEC from regulating Bitcoin.
The Bitcoin ecosystem — if it can be called that — has seemed like the wild West since its inception. Between this settlement, the closure of the Silk Road marketplace, and the warning to investors about Bitcoin’s volatility, it seems that the government wants to prove that there’s a new sheriff in town. Or, to put it more accurately, that the old sheriff never even left.
Reactions from around the Web
Gigaom thinks the SEC’s actions are a tad ironic:
It is perhaps ironic that the SEC’s action against Voorhees may have helped further legitimize bitcoin as a currency since the agency treated the security sales as if they were made with real money:
“Investors paid for their shares using Bitcoin, a virtual currency that can be used to purchase real-world goods and services and exchanged for fiat currencies on certain online exchanges.”
Bloomberg View tries to figure out if SatoshiDICE and FeedZeBirds’ investors got screwed:
Voorhees initially IPOed SatoshiDICE in August 2012, ultimately selling 13 percent of the company for 50,600 bitcoins worth about $700,000. In July 2013, Voorhees sold SatoshiDICE for $12.4 million, and after announcing the pending sale went and bought back all of those shares for 45,500 bitcoins worth about $3.8 million. So his investors, in the aggregate, made a 400+ percent return in less than a year.
Wait no did I do that right? Or did they lose 10 percent in less than a year? I mean, in aggregate, they invested 50,600 bitcoins and got back 45,500, for about a 10 percent loss in bitcoins. But also, in aggregate, they invested 700,000 American dollars and got back 3,800,000 of them, for about a 437 percent return in American dollars. So I guess they’re not complaining? Or maybe they are, I have no idea. I gather that complaining is a thing that bitcoin investors sometimes do.
CoinDesk notes the SEC’s changing approach to handling Bitcoin:
The SEC charges against Voorhees represent one of the most high-profile cases against a bitcoin entrepreneur for securities violations to date.
Previously, the SEC had hinted that it was only investigating bitcoin and companies in the ecosystem in a bid to warn investors about the dangers of investing in digital currencies.
Pando weighs in
The warning couldn’t come at a better time. Bitcoin has been incredibly volatile over the last year, with abrupt swings between fantastic growth and debilitating losses. The (formerly) largest exchange is now accused of losing and mismanaging almost $500 million in bitcoins. Once characterized as a tool made specifically for keyboard anarchists and people looking to buy illicit goods from the dark Web, the currency is now racked with fraud and fear.
But the SEC might have warned investors about another risk associated with Bitcoin: the government’s ability to seize hundreds of thousands of bitcoins and liquidate them before convicting their owners of a single crime. That’s exactly what happened after the government shut down the infamous Silk Road marketplace, which was used to sell everything from drugs to firearms, and seized millions of dollars worth of bitcoins from the marketplace’s customers.
There’s no smoking gun to which this latest run-up in the bitcoin price can be attributed, but there’s no question that the bulls have the momentum at the moment. Given the relatively small size and limited liquidity of the bitcoin market, these rallies, like the downturns, tend to last for extended periods of time.
The last time bitcoin went on a run like this, it climbed more than tenfold over six months from $84 on July 1, 2013 to a high of $1,147 on December 4, before falling to $757 by the end of the year (and a low of $360 on April 10 at the depths of the Mt. Gox implosion and scandal).
In many ways this type of transparency and such a solitary leader are at odds with bitcoin’s foundational tenets: it was created as a decentralized and distributed system meant to remove the need for trust between parties. Rabid libertarians and cyberpunks may be ok with such a system, but average Joes, not to mention the regulators intent on protecting them, are not.
The bitcoin protocol solves a real problem by allowing digital transactions to be completed outside of the costly and cumbersome existing financial infrastructure, but for the value of this solution to be realized, people have to use it. Bitcoin may have emerged as an anti-establishment financial instrument, but for it to survive and more importantly fulfill its lofty potential, it will need to shed much of its early ideology. Trust is key, and trust does not grow in the shadows.
Mt. Gox’s unraveling doesn’t need to be the end of bitcoin, but it needs to be the end of its innocence.
[illustration by Brad Jonas for Pando]