A Texas man has been charged by the Securities and Exchange Commission for allegedly running a Bitcoin Ponzi scheme. By promising investors returns from a weekly interest rate of up to 7 per cent Trendon Shavers raised about 700,000 Bitcoins between 2011 and 2012. This sum was worth $4.5 million at the time and more than $65 million at current rates.

Bitcoin, a form of electronic, or virtual, money is independent of any central authority and can be transferred through a computer or smartphone without an intermediate financial institution. It is considered a peer-to-peer, electronic cash system, with extremely volatile exchange rates, causing increasing concern for regulators across the globe.

Keeping this in mind, Shavers advertised his “Bitcoin Savings and Trust” bank as profiting from a Bitcoin market arbitrage strategy – supposedly making money by buying and selling the currency to take advantage of the fluctuating market prices.

In reality, BTCST was a Ponzi scheme in which Shavers used Bitcoins from new investors to cover the interest payments to existing investors. The SEC has accused Shavers of advertising his services online under the handles ‘Pirate’ and ‘pirateat40’ and allegedly telling his clients that the “risk is almost zero”.

Shavers also transferred more than 150,000 Bitcoins to his personal account in order to conduct day trading and pay for his accommodation, car, food and general shopping.

The case has led the SEC to issue a warning to investors to approach schemes involving virtual currencies with as much scepticism as they would for more traditional investments.

“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, the director of 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.”

As a result, the SEC has charged Shavers with offering and selling investments in violation of the anti-fraud and registration provisions of the US securities laws, and has asked the courts to freeze Shavers’ assets indefinitely.

The case is one of the first criminal prosecutions related to Bitcoin, and the debate is still continuing as to whether the virtual currency, launched in 2009, is in need of official regulation.

Stateless and bankless, Bitcoins are not subject to regulation or fees, and therefore enjoy extreme volatility, according to its proponents. But according to regulators like SEC and the US Commodity Futures Trading Commission, this is exactly the problem. For example, Bitcoin value recently dropped by nearly 80 per cent from an all-time high of $266 before crashing to $55 on one particularly bleak April day, resulting in large losses for investors.

This prompted the CFTC to consider regulating the virtual currency Bitcoin in a bid to protect consumers against the risks associated with the currency. But since the announcement in May, any formal suggestions for regulation have yet to be seen.

Similarly, growing concerns over the online cash being used for illicit activities also led the US Treasury Department to implement new money-laundering rules in April, forcing Bitcoin and other virtual currency firms to comply with strict regulation.

Potential regulation of Bitcoin has been a hot topic in the US and in several European countries for some time, with national regulators unsure on whether the virtual currency falls under their jurisdiction. This even led several national regulators to suggest that international virtual currencies might entail regulation by a global regulatory body, rather than on national levels alone.

However, with this latest criminal case by the SEC, the concerns relating to Bitcoin are becoming more apparent and specific regulation on virtual currencies might be a step closer.