As stated in various other venues, MPEx does retain ample counsel. We've proactively prepared a defensive litigation plan and written as well as oral arguments in order to be able to defend our position as well as the interests of the larger Bitcoin community in multiple relevant jurisdictions.
After much internal debate, and in the light of recent developments (by which I mean the misguided actions of one patently incompetent and emotionally unstable individual behaving in a manner consistent with mid-age onset schizophrenia) I've decided to prepare and release a limited statement detailing in principle our considered position on some matters of interest.
The reasoning is that while it is both unwise and uncommon for legal arguments to be disclosed before actual litigation due to the obvious advantage this confers on the other party, nevertheless it would seem the community could significantly benefit by some general framework to consider things within. In balancing this latter need with the former imperative I think MPEx is behaving generously to its environment while at the same time not significantly endangering its own position.
What follows is not a legal document per se, because it has been much abridged, it lacks significant devices, references etc and and for this reason it shouldn't be included in litigation as-is. It would be in the best case an amicus brief.
I. The Securities and Exchange Comission is governed principally by the Securities Act of 1933, which gives a definition of a security as follows :
(1) The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
The meaning of this definition has been mostly established by the Certiorari to the Circuit Court of Appeals for the Fifth Circuit, generally known as SEC vs W.J. Howey Co. et al.i, which discusses its meaning based on common use in blue-sky states previous to the enactment of the law, and introduces the Howey test. To wit :
Section 2 (1) of the Act defines the term "security" to include the commonly known documents traded for speculation or investment. This definition also includes "securities" of a more variable character, designated by such descriptive terms as "certificate of interest or participation in any profit-sharing agreement," "investment contract" and "in general, any interest or instrument commonly known as a `security.'" The legal issue in this case turns upon a determination of whether, under the circumstances, the land sales contract, the warranty deed and the service contract together constitute an "investment contract" within the meaning of § 2 (1). An affirmative answer brings into operation the registration requirements of § 5 (a), unless the security is granted an exemption under § 3 (b). The lower courts, in reaching a negative answer to this problem, treated the contracts and deeds as separate transactions involving no more than an ordinary real estate sale and an agreement by the seller to manage the property for the buyer.
The term "investment contract" is undefined by the Securities Act or by relevant legislative reports. But the term was common in many state "blue sky" laws in existence prior to the adoption of the federal statute and, although the term was also undefined by the state laws, it had been broadly construed by state courts so as to afford the investing public a full measure of protection. Form was disregarded for substance and emphasis was placed upon economic reality. An investment contract thus came to mean a contract or scheme for "the placing of capital or laying out of money in a way intended to secure income or profit from its employment." State v. Gopher Tire & Rubber Co., 146 Minn. 52, 56, 177 N.W. 937, 938. This definition was uniformly applied by state courts to a variety of situations where individuals were led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts of the promoter or of some one other than themselves.
As recently as 2011 this test was being applied (as for instance in USA vs Thomas Anderson Bowdoin, jr) as 1. Investment of Money towards a 2. Common Enterprise which 3. Depends on the Efforts of Others and likely remains in full force as the standard test for the matter pending further Supreme Court rulings.
II. It is our considered opinion that Bitcoin does not constitute either "Money" as discussed in the second reference nor does a purchase of a Bitcoin denominated virtual security such as offered on MPEx constitute "the placing of capital or laying out of money" as discussed in the first reference.
III.1. At some point in 2008 or 2009, an unknown person or group created a new, innovative Massive Multiplayer Online Player Game by means of introducing a cryptographically-secure, peer-to-peer distributed currency. This move was both technically brilliant and direly necessary : all MMORPGs to date have collapsed due to the poor management of their economies, mostly through in-game currency debasement carried on haphazardly by the game developers. The introduction of this new currency, which is undebasable, has given rise to ample development efforts of unrelated third parties to fill in the gaps and release to the public MMORPGs taking advantage of this significant technical advancement.
III.2. The advantage of Bitcoins of being undebasable comes from the particular manner in which new coins are created. The only manner to acquire coins is to run a computer in prescribed fashion for an interval of time. This practice is commonly known under the name "farming" in game communities. The activity of "gathering game resources" is regarded by most players as boring and cumbersome, and since it lends itself in most cases to automation virtually every game that is large enough has one or multiple "bots", ie computer programs created by third parties that automate the gathering of game resources for the player, without requiring his significant intervention. Some games, which are owned and developed by known persons or groups, introduce a license either forbidding outright or else curtailing the practice of using automated means ("bots") to gather game resources, because of a perceived "unfairness" this introduces in the game environment. Bitcoin however lacks any such authority or group that could impose a license on users, and possibly for this reason goes in practice the other way, placing the tools of automation at everyone's disposal yet limiting the creation of game currency by other means (and it is neither the first nor the only to walk down this path).
III.3. While it is true that some people spend money or other capital to acquire such in-game currency, it is not true that :
a) Any authority exists which could issue Bitcoins, promise to issue Bitcoins, or make any representations as to Bitcoins whatsoever ;
b) Any state, government or organisation issues Bitcoins or could conceivably issue Bitcoins either as legal tender, for the payment of taxable income, as a currency of account or to be used in local or international trade.
Because of these reasons it can not be said that anyone holds any title in either law or equity to any Bitcoin. Since there is no first owner of the Bitcoin that could then pass title as part of a contract, all purported Bitcoin "purchases" are contracts for no consideration and as such legally without merit.
Furthermore, while it is true that Bitcoin may be regarded as an item of value by one or more people, this also is true of the in-game currency of each and every single one game ever released to this date and to be released for the conceivable future. Ruling that indeed Bitcoin constitutes in itself either money or capital in the sense of the Securities Act of 1933 would both retroactively expose all game developers and game players to extensive and burdensome reporting and compliance requirements as well as burden the SEC with an enormous task. Further, it would severely limit and curtail the ability of future game developers to bring computer games to the general public. In either case such extensive re-writing of existing and well understood law can not be the empire of the court system, and unless or until such a time as Congress introduces legislation specifically rendering online in-game currencies legal tender, or otherwise money, or capital this matter can only be laid to rest.———
- Case summary : Two connected Florida corporations were offering patrons of a nearby hotel operated in connection with them the opportunity to buy land in a citrus grove, which land was apportioned in long thin strips usually as wide as one tree line, and also offered a contract to farm the land and market the produce. While the Court of Appeals agreed with the first instance in rejecting the claim of the SEC that this constuction amounted to an investment contract, the Supreme Court reversed. [↩]