Texas man charged in multimillion-dollar Bitcoin Ponzi scheme
Risk-free investments carried some risk, it turns out
The US Securities and Exchange Commission has issued a warning about the potential dangers of investing in virtual currencies, after a Texas man allegedly managed to bilk residents of multiple states out of Bitcoins worth more than $60m at today's exchange rate.
On Tuesday, the SEC announced that it has charged Trendon Shavers of McKinney, Texas with operating a Ponzi scheme under the name Bitcoin Savings and Trust (BTCST).
The agency alleges that BTCST offered Bitcoin-denominated investments over the internet at interest rates of up to 7 per cent per week, which Shavers claimed was possible because of arbitrage opportunities inherent in the Bitcoin market.
According to Shavers – who flogged his investment opportunities under the online handles "Pirate" and "pirateat40" – BTCST made money by collecting fees from individuals who wanted to buy large quantities of Bitcoin quickly and discretely, which BTCST then returned to investors as interest.
Shavers allegedly told investors that he had "yet to come close to taking a loss on any deal," and that the risk of investing in BTCST was almost zero.
But it was all a scam, according to the SEC, and any profits BTCST earned were illusory. Instead, Shavers allegedly used money from new investors to make "interest" payments to earlier ones and to cover withdrawals. He is also alleged to have diverted funds to his own accounts.
The SEC claims Shavers raised at least 700,000 Bitcoin in 2011 and 2012 – equivalent to more than $65m at today's exchange rate, though worth around $4.5m at the time – and while he paid back 507,148 Bitcoins to investors, at least 150,649 Bitcoins went into his own pocket.
Shavers lost some of the diverted virtual currency through unsuccessful day trading on a Bitcoin currency exchange, but he still managed to come away with proceeds of $165,000, most of which he spent on things such as rent, food, utilities, and other personal expenses – including, not surprisingly, gambling.
The SEC has charged Shavers and BTCST with violations of US securities laws and is seeking to freeze their assets, in addition to recovering any ill-gotten gains and applying any other penalties as appropriate under the law.
The move comes amid growing debate over whether Bitcoin and similar virtual currencies are in need of closer scrutiny by US financial authorities. Bitcoin has been involved in legal actions by several agencies in recent months, but its regulatory status remains a grey area.
In an investor alert issued on Tuesday, the SEC cautioned investors that although Bitcoin may seem attractive because of perceived privacy benefits and lack of regulatory oversight, the SEC treats cases like Shavers' the same as it does ones involving US currency.
"Any investment in securities in the United States remains subject to the jurisdiction of the SEC regardless of whether the investment is made in U.S. dollars or a virtual currency," the alert states. "In particular, individuals selling investments are typically subject to federal or state licensing requirements."
In a statement, Lori Schock, director of the SEC's Office of Investor Education and Advocacy, said that investors would also be wise to view Bitcoin investment opportunities the same way they do investments involving traditional currencies.
"Ponzi scheme operators often claim to have a tie to a new and emerging technology as a lure to potential victims," Schock said. "Investors should understand that regardless of the type of investment, a promise of high returns with little or no risk is a classic warning sign of fraud." ®