Recently the SEC charged a Texas man with defrauding investors in a Ponzi scheme involving Bitcoin, a peer-to-peer payments system that allows people to pay each other from virtual accounts.
According to the SEC complaint, 30-year-old Trendon T. Shavers operated a sham investment scheme called Bitcoin Savings and Trust, or BTCST, based on promises to investors of weekly returns of up to 7 percent.
Using the monikers “Pirate” and “pirateat40,” Shavers allegedly raised a total of 700,000 Bitcoin in 2011 and 2012, then worth about $4.5 million, through his scheme. Today, the SEC says the value of 700,000 Bitcoin exceeds $60 million.
“In reality, BTCST was a sham and a Ponzi scheme in which Shavers used Bitcoin from new investors to make purported interest payments and cover investor withdrawals on outstanding investments,” according to the SEC.
Shavers also used 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.
Bitcoin is an experimental, decentralized digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority: managing transactions and issuing money are carried out collectively by the network. The total supply of Bitcoins is known at any time, and the cryptographic structure means that there is a set limit on how many can ever be in circulation. Transactions are effectively anonymous.
“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 M. 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.”
The investigation against Shavers prompted the SEC to issue an alert warning investors about the dangers of potential investment scams involving virtual currencies promoted through the Internet.
The SEC 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.