“Bitcoin is a tool for freeing humanity from oligarchs and tyrants, dressed up as a get-rich-quick scheme.” Naval Ravikant
On April 3, 2014, the Texas Department of Banking took the lead on protecting digital currency from stifling state-law money transmission regulations. In Supervisory Memorandum 1037, entitled, “Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act,” Texas became the first state to exempt the exchange of “virtual currencies” from “money transmission” licensing requirements. Several states followed Texas’s deregulatory lead.
On June 24, 2015, Texas Governor Greg Abbott announced (by video) that his re-election campaign would be accepting Bitcoin contributions, explaining that “Bitcoin, a new and decentralized digital currency, enables instant financial transactions with a new level of safety and security.” Abbott for Governor, Abbott Campaign Accepts Bitcoin, available at https://www.gregabbott.com/abbott-campaign-accepts-bitcoin/ (June 24, 2015). The Governor’s website also cites several of Bitcoin’s primary features in a Bitcoin Fact Sheet, and concluded with the primary economic benefit for Texans: “Bitcoin transaction fees, if any, are significantly less than those associated with traditional forms of payment because this form of currency is transferred user-to-user, eliminating the presence of a third party financial institution.”
Last year, Texans demanded constitutional protection for Bitcoin and other digital currencies. On March 2, 2017, Texas State Representative Matt Schaefer filed Texas House Joint Resolution 89, seeking to amend Article I of the Texas state constitution to enshrine Texans’ right to use any “mutually agreed upon medium of exchange,” including “digital currency,” while prohibiting the State from outlawing or encumbering any currency. Unfortunately, the proposal was left pending in the Investments & Financial Services Committee, where the effort stalled.
In December 2017, the Texas State Securities Board (“TSSB”) entered the regulatory fray. Eschewing Texas’s prior hands-off approach, the TSSB has affirmatively opened multiple enforcement actions accusing non-Texas businesses of violating Texas securities laws. Over the course of two months, the TSSB issued five Emergency Cease & Desist Orders against five digital currency related businesses: USI-Tech Limited, BitConnect, R2B Coin, DavorCoin, and LeadInvest.
BitConnect, DavorCoin, and LeadInvest all involve digital currency lending programs, in which individuals sell Bitcoin in exchange for another digital currency, like BitConnect or DavorCoin, which in turn is lent to others at interest. USI-Tech and LeadInvest both involve investments in mining contracts, in which individuals exchange fiat or digital currency in exchange for a fixed amount of mining (computing) power and receive the corresponding portion of the block reward for successfully verifying transactions on the Bitcoin (or other digital currency) blockchain. R2B Coin was offering a “pre-sale” of the R2B Coin.
The TSSB found that all five business were: (a) selling investments that constitute securities as defined by Section 4.A of the Texas Securities Act; (b) violating Section 7 of the TSA by offering securities for sale in Texas at a time when the securities are not registered with the Securities Commissioner; © violating Section 12 of the TSA by offering securities for sale in Texas without being registered pursuant to the provisions of Section 12 of the TSA; (d) engaging in fraud in the connection with the offer or sale of securities; and (e) making offers containing statements that are materially misleading or otherwise likely to deceive the public. The TSSB further found that the conduct of all five businesses threatened immediate and irreparable public harm, warranting the issuance of an Emergency Cease & Desist Order pursuant to Section 23-2 of the TSA.
One could argue the TSSB’s actions will ultimately benefit Bitcoin and other digital currencies by filling the gap left by federal enforcement agencies and enforcing time-tested laws designed to protect consumers from unscrupulous promoters, thereby allowing legitimate businesses to thrive. One could also argue the TSSB’s actions harm Bitcoin by chilling investment in blockchain-related businesses, and are designed merely to grab headlines. Do Texans really need protections from promoters claiming that Supreme Court Justice Ruth Bader Ginsburg is moonlighting as a blockchain developer? TSSB Press Release, “Ruth Bader Ginsburg Did Not Approve This Message.” (March 5, 2018). In future blog posts we will explore this question, other regulatory developments concerning digital currencies in Texas, and the regulatory treatment of utility tokens and initial coin offerings.
✱ The author hodls Bitcoin, mines Ethereum, and trades altcoins.