Trendon Shavers recently turned up in a Texas courtroom, arguing that Bitcoin is not money. Well, it may have been his lawyer making the case. But you get the idea.
The dispute started earlier this summer, when the SEC charged the 30-year-old Shavers with using the digital currency to run a Ponzi scheme that amassed the equivalent of about $5 million. But when the matter came before a court in the Eastern District of Texas, Shavers insisted that Bitcoin is not subject to regulation by the United States; that his now-defunct business, Bitcoin Savings & Trust, never saw any money change hands; and that the SEC therefore has no right to hit him with a lawsuit.
The court did not embrace this idea. On Tuesday, Judge Amos Mazzant ruled that Bitcoin is indeed money. "It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses," the judge wrote. And because it's money, the judge ruled, the Bitcoins pumped into Shavers' operation "meet the definition of investment contract, and as such, are securities" -- and that means the SEC can proceed.
The sky is blue. The world is round. And Bitcoin is a functional form of value exchange that is subject to regulation.
"This isn't that shocking," says Patrick Murck, legal counsel for the Bitcoin Foundation, the independent Bitcoin watchdog. "If anyone wants to run a Ponzi scheme in Bitcoin, they can expect to get busted. If you run a Ponzi scheme anywhere, you're gonna get busted -- and you should. Bitcoin isn't some sort of silver bullet that somehow ameliorates all the legal concern around your otherwise illegal activity."
>'Bitcoin isn't some sort of silver bullet that somehow ameliorates all the legal concern around your otherwise illegal activity.'
Patrick Murck
He calls it "Bitcoin Magical Thinking" -- the notion that you can do whatever you want with the open source digital currency and not pay the consequences. "Someone will say: 'I'm gonna build a stock exchange that's totally unlicensed and no registration is required, but it uses Bitcoin, so it's OK,'" Murck says. "It doesn't work that way. You're still selling securities."
The government has not laid down regulations for digital currencies, but it has begun to crack down on Bitcoin, an online system for trading system for digital currency that is not controlled by a central bank. In May, it froze two (real world) bank accounts that belonged to major Bitcoin exchanges.
Driven by open source software, the Bitcoin system is distributed across machines that span the globe, and the supply of the digital currency is controlled not by humans but by computer algorithm. Bitcoin can be used for other things -- as Murck points out, a new system lets you exchange real estate titles -- but today, it is, first and foremost, a means of trading money.
Trendon Shavers did not respond to phone calls made to what are believed to be his phone numbers, nor to emails sent to his previous addresses. It surprised some that Shavers -- or at least his lawyer; the court filings leave it unclear -- turned up in court to argue his point. Judging from court documents, Shavers is still living in McKinney, Texas, intent on fighting the SEC.
In his profile on the Bitcoin Forum, Shavers once identified himself as a pirate. There was a pirate icon, complete with a peg leg and a parrot, and the tagline read: “Yes I am a pirate, 200 years too late,” a nod to a Jimmy Buffet song.
According to the SEC, Shavers collected over 700,000 Bitcoins from investors -- about $5 million, at the time -- after claiming that he could give them a one percent return on investment. But according to the SEC, money collected from some investors was used to cover withdrawals by others -- and Shavers' own expenses. He started losing Bitcoins, the SEC says, and by August of 2012, he shut down the operation, returning only about 500,000 Bitcoins to his investors.
Though he was merely stating the obvious, the ruling from Judge Mazzant does create a legal precedent that wasn't there before. Perhaps the decision will help the world realize that Bitcoin is not immune to government regulation. Perhaps we have the antidote to Bitcoin Magical Thinking.
