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Regulation and Compliance > Federal Regulation > SEC

SEC Slams Programmer of Virtual Currency-Based Stock Exchanges

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The Securities and Exchange Commission Monday sanctioned a computer programmer for operating two online venues that traded securities using virtual currencies bitcoin or litecoin without registering them as broker-dealers or stock exchanges. 

According to the SEC’s order instituting a settled administrative proceeding, the programmer, Ethan Burnside, and his company BTC Trading Corp. operated two online enterprises – BTC Virtual Stock Exchange and LTC-Global Virtual Stock Exchange – from August 2012 to October 2013.

These exchanges provided account holders the ability to use bitcoin or litecoin to buy, sell and trade securities of businesses (primarily virtual currency-related entities) listed on the exchanges’ websites. 

However, as the SEC explains, the venues weren’t registered as broker-dealers despite soliciting the public to open accounts and trade securities, nor were they registered as stock exchanges despite enlisting issuers to offer securities for the public to buy and sell. 

Litecoin is described as a peer-to-peer Internet currency that enables instant, near-zero cost payments to anyone in the world, and is an open source, global payment network that is fully decentralized without any central authorities.

Litecoin has also been described as the second-largest cryptocurrency in terms of market capitalization.

David Berger, founder and CEO of the Digital Currency Council, says that Litecoin’s market cap, at $127 million, is a tiny fraction of Bitcoin’s market cap, which stands at $4.9 billion.

“Burnside operated two online enterprises that weren’t properly registered to engage in the securities business they were conducting,” said Andrew Calamari, director of the SEC’s New York Regional Office, in a statement. “The registration rules are vitally important investor protection provisions, and no exemption applies simply because an entity is operating on the Internet or using a virtual currency in securities transactions.”

Berger says that the SEC sanction highlights that “an enterprise engaging in the securities business is subject to SEC oversight, regardless of whether it is dealing in traditional or digital currency.”

Investors seeking to capitalize on the rapidly emerging digital currency economy, he continued, ”are well advised to seek a competent advisor – i.e., a professional with an in-depth understanding of both digital currencies and the securities laws. There are ample means of accessing exposure to Bitcoin through registered investment vehicles.”

The SEC’s order also finds that Burnside conducted separate transactions in which he offered investors the opportunity to use virtual currencies to buy or sell shares in the LTC-Global exchange itself and a separate litecoin mining venture he owned and operated. These offerings were not registered with the SEC as required under the federal securities laws.

Burnside was also sanctioned for conducting unregistered offerings, and because he “significantly cooperated” with the SEC’s investigation agreed—without admitting or denying the agency’s findings—to settle the case by paying more than $68,000 comprising his profits from the unregistered venues plus interest and a penalty. Burnside and BTC Trading Corp. consented to cease and desist from committing or causing any future violations of the registration provisions. Burnside was barred from the securities industry with the right to reapply after two years.

— Check out Should 401(k)s Have Bitcoin? on ThinkAdvisor.


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