The Securities and Exchange Commission today sanctioned a computer programmer for operating two online venues that traded securities using virtual currencies Bitcoin or Litecoin without registering the venues as broker-dealers or stock exchanges.
This action by the SEC clearly shows that the US authorities deem Bitcoin-related activity to be a matter for the mainstream regulators, especially when traded on stock exchanges.
The programmer, Ethan Burnside, also was sanctioned for conducting unregistered offerings. He significantly cooperated with the SEC’s investigation and agreed to settle the case by paying more than $68,000 comprising his profits from the unregistered venues plus interest and a penalty. He also is barred from the securities industry.
According to the SEC’s order instituting a settled administrative proceeding, 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. The venues weren’t registered as broker-dealers despite soliciting the public to open accounts and trade securities.
The venues weren’t registered as stock exchanges despite enlisting issuers to offer securities for the public to buy and sell. 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 operated two online enterprises that weren’t properly registered to engage in the securities business they were conducting,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “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.”
According to the SEC’s order, Burnside and BTC Trading Corp. actively solicited the public to open accounts by advertising the websites for both of his stock exchanges on the Bitcoin Forum and other websites dedicated to virtual currency.
The solicitation efforts resulted in approximately 2,655 users opening online accounts with LTC-Global exchange and executing approximately 60,496 trades through the website, paying a total of 12,081 litecoins in transaction-based compensation.
Approximately 7,959 users opened online accounts with the BTC exchange and executed approximately 366,490 trades through the website, paying a total of 2,141 bitcoins in transaction-based compensation. The SEC’s order finds that in this line of business, Burnside and BTC Trading Corp. were required to register their online enterprises with the SEC as brokers or dealers.
The SEC’s order further finds that Burnside and BTC Trading Corp. failed to register the LTC-Global exchange or the BTC exchange as exchanges despite providing issuers a platform to create and list initial and secondary offerings of securities in exchange for a listing fee. A total of 52 issuers paid BTC Trading Corp. 11,450 litecoins in listing fees to list their shares with the LTC-Global exchange, and 69 issuers paid 210 bitcoins in listing fees to list their shares with the BTC exchange.
The SEC’s order finds that Burnside willfully violated Sections 5(a) and 5(c) of the Securities Act of 1933, and that Burnside and BTC Trading Corp. willfully violated Sections 5 and 15(a) of the Securities Exchange Act of 1934.
Without admitting or denying the SEC’s findings, Burnside and BTC Trading Corp. consented to cease and desist from committing or causing any future violations of the registration provisions. Burnside agreed to be barred from the securities industry with the right to reapply after two years, and he must pay $58,387.07 in disgorgement and prejudgment interest plus a penalty of $10,000. The penalty amount reflects prompt remedial acts taken by Burnside as he cooperated with the SEC’s investigation.
The SEC’s investigation was conducted in coordination with the agency’s Digital Currency Working Group by New York Regional Office staff Daphna A. Waxman, Daphne P. Downes, Philip R. Moustakis, and Valerie A. Szczepanik. The case was supervised by Amelia A. Cottrell.