For the first time, questions as to the authority of federal agencies to regulate bitcoin are moving to federal court.  According to Bloomberg:

“[a] Brooklyn businessman…was charged with promoting digital currencies backed by investments in real estate and diamonds that U.S. prosecutors said didn’t exist. The Securities and Exchange Commission also sued.

U.S. District Judge Raymond Dearie said he’ll allow [Defendant’s] lawyers in both the criminal and civil cases to challenge whether ICOs can be considered a security under U.S. law. The government has until March 19 to file its argument that cybercurrency is a security.”

As seen in the extract above (and the article’s title:  “Can Bitcoin Be Regulated? U.S. Courts Are About to Decide”), many news organizations have interpreted the judge’s actions as enabling a referendum on whether or not “bitcoin” comprises a security.   I’m not sure if that’s exactly right.  The question, as at least framed by the SEC, is whether or not the specifics of the scheme, called “Initial Membership Offerings,” constitute a securities offering, and whether or not the underlying “memberships” were analogous to coins  or tokens (in a generic sense) that are securities.

Specifically, the SEC complaint alleges:

In an attempt to skirt the registration requirements of the federal securities laws, Defendants…have refashioned the sale of the purported Diamond interests as sales of “memberships in a club,” and the Diamond ICO as an “Initial Membership Offering” or “IMO.” In reality, the supposed “memberships” are in all material respects identical to the ownership attributes of purchasing the purported (but, indeed, non-existent) “tokens” or “coins” and are securities within the meaning of the securities laws.

This comports largely with the traditional US approach to applying federal securities laws to novel or exotic financial arrangements.  The analysis, and rulings, are largely ad hoc, and applied to the facts and circumstances of individual transactions.  This is especially important in the context of crypto-securities, where you can have on the one hand “native” tokens like bitcoin and other more complex crypto-debt instruments that arguably fit more easily into classic conceptions of investment contracts.

With all of this in mind, the case represents for me a fact based analysis of whether the specific membership arrangement meets the four pronged test of an investment contract under Howey:  an investment of money, in a common enterprise, with the expectation of profits, where the investor is dependent on others.  As such, the case appears to be much less exotic than that of whether bitcoin, or for that matter all coin ICOs, are securities, as has been occasionally implied.


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