On December 8, 2014, the Securities and Exchange Commission sanctioned the operator of two online, virtual currency-denominated securities exchanges for violation of the securities registration laws. From August 2012 through October 2013, Ethan Burnside and his company, BTC Trading Corp., operated two online exchanges through which account holders could buy, sell, and trade securities of businesses listed on the websites using Bitcoin and Litecoin. Burnside did not register the exchanges – LTC-Global Virtual Stock Exchange and BTC Virtual Stock Exchange – as broker-dealers or stock exchanges.

According to the SEC’s order (available here), Burnside also conducted unregistered offerings in which he offered investors the opportunity to use virtual currency to buy or sell shares in the LTC-Global exchange and in a separate Litecoin mining venture owned by Burnside. Andrew Calamari, Director of the SEC’s New York Regional Office, explained, “The registration rules are vitally important investor protection provisions, and no exemption applies simply because an entity is operating on the Internet or using a virtual currency in securities transactions.”

As virtual currency is becoming more mainstream, regulators are taking notice, and the SEC is no exception. In May of this year, the SEC issued an Investor Alert on Bitcoin and other virtual currency- related investments (available here). And in June, the SEC sanctioned the co-owner of two Bitcoin- related websites for publicly offering shares in two ventures without registering them (order available here). Andrew Cereseny, director of the SEC’s Division of Enforcement, has said the SEC will “focus on enforcing our rules and regulations as they apply to digital currencies.” Therefore, companies and individuals involved in the sale of securities must comply with existing SEC registration rules, regardless of whether sales are transacted in Bitcoin or other virtual currency.

In this case, the SEC noted that Burnside fully cooperated with the SEC’s investigation. The SEC ordered Burnside to pay disgorgement and civil penalties totaling $68,000.

This latest development demonstrates once again that just because digital currencies create and hold value in a different format, they are not immune to legal scrutiny and a wide range of law enforcement claims. Compliance with applicable laws is always critical.