SEC Considers Bitcoin Miner Hosting Services as Securities

The United States Securities and Exchange Commission (SEC) has raised concerns in a recent lawsuit, indicating that third-party Bitcoin mining hosting services might be classified under securities law. This claim has met with strong opposition from a leader in the industry.

Key Takeaways

The SEC has filed a lawsuit against Bitcoin miner VBit and its founder, Danh Vo, alleging fraud involving $48 million in investor funds.
The SEC argues that VBit’s hosting agreements qualify as securities under the Howey test due to the investment expectations of buyers.
VBit allegedly did not adhere to standard industry practices, depriving investors of the ability to monitor their mining rigs.
Experts suggest that the SEC’s classification could misrepresent how hosted Bitcoin mining functions.

On Wednesday, the SEC initiated legal action against VBit, a Bitcoin mining enterprise, and its founder, Danh Vo, in a Delaware federal court. The agency accuses them of fraudulent activities and misappropriating approximately $48 million in funds from investors between 2018 and 2022 by selling more hosting agreements than actual mining rigs.

SEC flags Bitcoin miner hosting services as subject to securities laws

SEC's Position on Hosting Agreements

According to the SEC, “VBit’s Hosting Agreements are investment contracts and therefore securities.” The agency asserts that these contracts fulfill the criteria of the Howey test, which is used to determine if certain transactions qualify as investment contracts.

Fraud, Security, SEC, Bitcoin Mining, Hashrate A highlighted excerpt of the SEC’s lawsuit claiming VBit’s hosting agreements are securities. Source: SEC

The SEC argues that those who purchased Hosting Agreements expected a passive income and solely depended on VBit's efforts to generate profits since they did not have control over the mining rigs they thought they acquired.

Allegations About VBit's Operations

The SEC highlights that VBit's Bitcoin mining hosting service significantly deviated from standard industry practices. Investors reportedly could not track their rigs, and VBit maintained total operational control throughout the process.

Additionally, VBit was accused of steering hashrate to a mining pool that it controlled. The SEC views this as a key reason for classifying VBit's hosted Bitcoin mining agreements as securities. The agency noted, "The fortunes of each investor were purportedly tied to the fortunes of other investors because every investor’s chance of earning a profit was tied directly to the performance of the larger VBit mining pool. The more investors recruited into the mining pool, the greater their chances of earning more Bitcoins."

Industry Responses to SEC's Claims

Mitchell Askew, the head of Blockware Intelligence, expressed to Cointelegraph that pooling hashrate is generally not a common practice among hosted Bitcoin mining service providers.

“Hosted Bitcoin mining simply involves a client purchasing a computer and the electricity needed to run it,” he explained. “There is no pooling of capital, no sharing of profits, and no dependence on a promoter to generate returns. According to the Howey test, this is definitely not a security.”

The SEC has not yet responded to requests for comment regarding this matter.

The SEC's contention that hosted Bitcoin mining can be classified as a security stands out as a significant perspective shift from views during the Trump administration, which generally took a more industry-friendly stance. While several high-profile cryptocurrency investigations initiated during the Biden administration have been dropped, numerous fraud-related lawsuits remain active.