Regulating Bitcoins: CFTC vs. SEC?

In the past year, Bitcoin has exploded into the public limelight and in the process gained the attention of U.S. regulators.

A full discussion of Bitcoin could make up an entire book (for a thorough discussion, see FT Alphaville's BitcoinMania series here). For the purposes of this post, Bitcoin is a peer to peer digital currency. Bitcoins may be traded on online exchanges for conventional currencies, U.S. dollars, or used to purchase goods and services from vendors accepting payment in Bitcoins. Bitcoin has also gained traction as an investment, and a registration statement for a Bitcoin ETF was filed with the SEC in July and amended in October. (Form S-1 available here)

Federal regulators in the United States have generally not issued specific guidance on Bitcoin's status. The Financial Crimes Enforcement Network (the Treasury bureau responsible for regulating currency market participants) required exchangers and administrators of digital currencies, such as Bitcoin, to register as money services businesses. However, other federal regulators have not issued any guidance on the treatment of Bitcoins, including the use of Bitcoins as an investment. Below, we compare the potential power of the two primary regulators over investments (the SEC and the CFTC) to regulate Bitcoins. The comparison is based on previous statements regarding Bitcoins from commissioners on the CFTC and the SEC.

SEC.

SEC Chairman Mary Jo White issued a letter about virtual currencies in response to a Senate hearing about Bitcoin held in November. In her testimony, Chairman White left the issue of whether Bitcoins, themselves, were securities to specific facts and circumstances regarding a particular use of Bitcoins. However, Chairman White explicitly stated that interests in entities owning Bitcoins would be securities subject to SEC regulation. A clear example of SEC authority comes from an SEC enforcement action this summer arising out of a Ponzi scheme centered around a Bitcoin trust (press release here). Whether Bitcoin itself would be a security would be a more difficult analysis. The strongest regulatory hook for deeming Bitcoin to be a security may be categorizing it a an "investment contract." As taught in securities regulation courses, an investment contract is any contract, transaction, or scheme involving: (1) an investment of money; (2) in a common enterprise; (3) with the expectation that profits will be derived from the efforts of another person.

Applying...