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What are Bitcoins and what laws apply to them? In a new post, Siskinds class action lawyer Daniel Bach explains what Bitcoins are and looks at a recent US court decision considering whether or not they should be governed by securities laws.The age-old question: “if a new security purports to be free of government regulation, will the government, in fact, regulate it?”  The emergence of bitcoins, a type of cryptographic “currency,” offers yet another opportunity to ask the question, but the answer remains the same: “Yes, of course.  Good thing too.”

Bitcoins?

Bitcoins, for those of you who were not aware of the phenomenon, are “a new kind of money.”[1]  Unlike “traditional” (that is, real) money, bitcoins are not controlled by a state.  The Canadian Dollar, for example, is controlled by the Government of Canada through its various apparatus, notably the Bank of Canada.  The value of the Canadian dollar is set by the market, and is influenced by, among other things, Canada’s economic strength, the Bank of Canada’s monetary policy and the value of various natural resources. 

The value of a bitcoin is not tied to any economy; its price is set purely by market forces (or, say its critics, rampant speculation).  In this respect, it is often described as “digital gold.”[2]  Like gold, its value is a function of demand and the total number of bitcoins in existence which is, in turn, constrained by the difficulty of “mining” bitcoins (done by running sophisticated and computationally-taxing cryptographic software).  Also, like gold, its value can be “volatile”:[3]

Price of BTC in USD, August 21, 2012-Aug 21, 2013.  Source: http://bitcoincharts.com/

Whether bitcoin is a “currency” or a type of “money,” as these terms are understood in the economics literature, is an interesting question beyond the scope of this post. 

Living up to the hype?

The central claim of bitcoin is that it is “not controlled by any government.”[4]  Accordingly, bitcoins are often promoted by those who fear governments will “debase” their wealth[5] as well as those who need a secure anonymous currency to trade in guns, narcotics and other contraband.[6]  In a narrow sense this claim is true, in that unlike the Canadian dollar there is no government management of bitcoins and, as they are not deposited in traditional banks, standard banking regulations are difficult or impossible to apply (which is—surprise!—why black marketeers love them).

Of course this is not the end of the story.  In our highly-regulated society, most everything has to submit to government regulation, and “securities” are no exception.  The regulatory question, simply, is “are bitcoins, or their derivatives, securities?”

In an interesting decision from the United States District Court for the Eastern District of Texas, Magistrate Judge Mazzant determined that bitcoins met the definition of a “security” (“any note, . . . stock, treasury stock, security future, security-based swap, bond . . . [or] investment contract. . .”) under U.S. securities law.[7]  A Canadian Court, faced with the same question, would likely reach the same result.  Ontario law defines “security” extraordinarily broadly and requires those that issue securities to meet stringent disclosure requirements.[8] 

This is a good thing.  At its simplest, securities law is about consumer protection.  The most basic assurance that an issuer makes when offering securities to investors is that they have provided, in a prospectus, “full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed.”[9]  It is hard to believe that any investor would not want this most basic protection, not to mention the oversight of Canada’s securities regulators.

So, should you buy bitcoins?  You need to decide that for yourself, after careful research.  Should you buy into a bitcoin investment from someone who refuses to offer you the protection of a prospectus issued in accordance with Canadian law?  Only if you want to risk getting less than “full, true and plain disclosure.”

Daniel Bach is a lawyer at Siskinds, LLP Toronto office. Daniel practices in the Class Action department with a focus on securities. If you have questions about securities or would like to report a possible fraud contact Daniel Bach at daniel.bach@siskinds.com.


[1] Bitcoin, online:  <http://bitcoin.org/en/>.
[2] Matthew O’Brien, “Bitcoin is No Longer a Currency”, The Atlantic (April 29 2013), The Atlantic, online: < http://www.theatlantic.com/business/archive/2013/04/bitcoin-is-no-longer-a-currency/274859/>.
[3] “The price of a bitcoin can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets. Consequently, keeping your savings in bitcoin is not recommended at this point. Bitcoin should be considered as a high risk asset, and you should never store money that you cannot afford to lose with Bitcoin.”, online, < http://bitcoin.org/en/you-need-to-know>.
[4] Simon Black, “Guest Post: “What in the World is a Bitcoin?””,  Zero Hedge, (March 15 2013), online: < http://www.zerohedge.com/news/2013-03-15/guest-post-what-world-bitcoin>.
[5] Ibid.
[6] Adrian Chen, “Now You Can Buy Guns on the Online Undergound Marketplace”, Gawker, (January 1 2013), online: < http://gawker.com/5879924/now-you-can-buy-guns-on-the-online-underground-marketplace>
[7] SEC v. Shavers et al, No. 4:13-cv-00416, 2013 U.S. Dist. LEXIS 110018 (E.D. Tex. Aug. 6, 2013).
[8] Securities Act, RSO 1990, c S.5, s 1.
[9] Securities Act, RSO 1990, c S.5, s 56.

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