Last week I wrote here about a novel lawsuit the SEC brought alleging a Ponzi scheme based on a "virtual currency" called Bitcoin. The SEC alleged that a Texas man named Trendon Shavers sold Bitcoin-denominated investments through the Internet, and "raised at least 700,000 Bitcoin in ... investments, which amounted to more than $4.5 million based on the average price of Bitcoin in 2011 and 2012 when the investments were offered and sold." 

In his defense, Shavers argued that the Bitcoin investments at issue are not securities because Bitcoin is not money, and are therefore not subject to regulation by the SEC. In a decision this week, however, U.S. Magistrate Judge Amos L. Mazzant (E.D. Tex.) ruled that as a type of investment contract, Bitcoin does meet the definition of a security subject to regulation. The court therefore concluded that it had subject matter jurisdiction to hear the SEC's case.

15 U.S.C. § 77b of the U.S. Code defines "security” as “any note, stock, treasury stock, security future, security-based swap, bond…[or] investment contract…”  An investment contract, in turn, 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.

Judge Mazzant explained that Bitcoin investments meet the definition of an investment contract (and therefore a security) because:

1. Investment of money. Bitcoin can be used to purchase goods or services and to pay for individual living expenses. It can also be exchanged for conventional currencies, such as the U.S.dollar, Euro, Yen, and Yuan. Therefore, the court ruled, Bitcoin is a currency or form of money.

2. Common enterprise. A common enterprise requires interdependence between the investors and the promotor. The court found that this was established in this because investors were dependent on Shavers' expertise in Bitcoin markets and were allegedly promised a substantial return on their investments as a result of his trading and exchanging Bitcoin.

3. Expectation of profits from efforts of promotor or third party. The court finds that this element was met because Shavers allegedly promised up to 1% interest daily, causing investors to expect profits his efforts.

The court's finding that it has subject matter jurisdiction means that the SEC's case against Shaver can be heard in federal court and the litigation may move forward.

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