The United States Securities and Exchange Commission (US) has stated in a recent lawsuit that third-party hosting arrangements for hosting Bitcoin may be classified under federal securities laws.
The commission’s position came to light during a lawsuit in Delaware in which the regulator sued VBit Technologies and its founder Danh Vo for defrauding thousands of investors by overselling mining contracts and embezzling funds between 2018 and 2022.
According to the lawsuit, the nature of the agreements makes VBit “investment contracts,” which the SEC calls securities because they meet the definition set forth in the Howey test.
Under the Howey test, any scheme that involves investing money in a common enterprise with the expectation of profits from the efforts of others can be considered a security.
The SEC argues that the VBit contracts were clear “investment contracts” that were “offered and sold in exchange for money” and constituted investments in a “common enterprise” where Vo “induced investors to expect profits from the efforts of third parties.”
“VBit’s efforts conducted in connection with the hosting arrangements were entrepreneurial and business-oriented,” the SEC said, adding that “investors who purchased hosting arrangements did so with the expectation of passive income and relied solely on VBit’s efforts to make a profit because the investors did not own, control, or control the mining platforms they purportedly acquired.”
As a result, the SEC has concluded that the hosting arrangements constitute unregistered securities offerings and is pursuing a fraud and registration violation case against Vo.
While some industry experts like Mitchell Askew argue that Bitcoin mining is a commodity activity and not a securities offering, the commission’s view could still set a precedent for how similar passive mining arrangements are treated under federal law.
The SEC’s stance has evolved since the Biden era
Under the previous administration led by former President Joe Biden, the SEC categorized the majority of crypto products and services as securities under its regulatory-by-enforcement approach.
The SEC, led by Gary Gensler at the time, was criticized by the industry for not having clear rules and stifling innovation through lawsuits.
During that period, the agency prosecuted at least 125 crypto enforcement cases and collected over and estimated $6 billion in penalties, including nearly a hundred settlements.
However, this approach has been reversed under the current administration, with the SEC now led by pro-crypto Chairman Paul Atkins.
Atkins has made it publicly clear that most crypto tokens cease to be securities once their networks become sufficiently decentralized, and as a result the SEC has withdrawn or suspended more than half of the crypto cases taken over by the previous administration.
Other key regulatory changes introduced by the Commission this year include the repeal of SAB 121, which previously barred banks from offering crypto custody by requiring them to classify customer assets as liabilities on their balance sheets.
