U.S. securities regulators have charged a Texas man with running a classic Ponzi scheme using Bitcoin, the online virtual currency.
The U.S. Securities and Exchange Commission (SEC) is alleging that Trendon Shavers, the founder and operator of Bitcoin Savings and Trust (BTCST), offered and sold Bitcoin-denominated investments online, raising at least 700,000 Bitcoin, which amounted to more than $4.5 million based on the average price of Bitcoin in 2011 and 2012 when the investments were sold, and would be worth more than $60 million at current exchange rates.
The regulator alleges that he promised investors up to 7% weekly interest that would be generated by Bitcoin market arbitrage activity. However, it charges that the operation was just a basic Ponzi scheme that used Bitcoin from new investors to make purported interest payments and cover investor withdrawals on outstanding investments. It also alleges that Shavers diverted investors’ Bitcoin for day trading in his account on a Bitcoin currency exchange, and exchanged investors’ Bitcoin for U.S. dollars to pay his personal expenses. These allegations have not been proven.
The SEC’s complaint charges Shavers and BTCST with offering and selling investments in violation of the anti-fraud and registration provisions of the securities laws. It is seeking a court order to freeze the assets of Shavers and BTCST in addition to other relief, including permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.
“Fraudsters are not beyond the reach of the SEC just because they use Bitcoin or another virtual currency to mislead investors and violate the federal securities laws,” said Andrew Calamari, director of the SEC’s New York regional office. “Shavers preyed on investors in an online forum by claiming his investments carried no risk and huge profits for them while his true intentions were rooted in nothing more than personal greed.”
At the same time, the SEC also issued an investor alert warning investors about the dangers of potential investment scams involving virtual currencies promoted through the Internet. The alert, issued by the SEC’s Office of Investor Education and Advocacy, recommends that investors be wary of investment opportunities that promise high rates of return with little or no risk, especially when dealing with unregistered, Internet-based investments sold by unlicensed promoters.
“Ponzi scheme operators often claim to have a tie to a new and emerging technology as a lure to potential victims,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy. “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.”