As the bitcoin industry has grown, it has increasingly drawn the attention and involvement of the securities industry and its regulators. Last week, the Winklevoss twins (known for suing Mark Zuckerberg, claiming he stole the idea for Facebook) launched their own bitcoin exchange, Gemini, which advertises itself as a “fully regulated, compliant, New York-based bitcoin exchange for both individuals and institutions alike.” Meanwhile, on October 1, federal authorities raided the offices of another digital currency company called Gemcoin after the Securities and Exchange Commission obtained a court order freezing the assets of the company and its founder, Steve Chen. The SEC complaint alleges, among other things, that Chen misrepresented Gemcoin as backed by millions of users, $15 billion in assets, and amber mining operations, all of which was false. Last month, Texas resident Trendon Shavers pleaded guilty to securities fraud in connection with a bitcoin Ponzi scheme. That action began last year as an SEC investigation into Shavers’ company, Bitcoin Savings and Trust, which raised over $50 million after promising its investors up to 7% interest per week based on the company’s bitcoin exchange arbitrage strategy.

Fraudulent schemes of this nature are nothing new, but the increasing popularity and market capitalization of bitcoin ($3.7 billion) and similar digital currencies attract both legitimate business interests and fraudsters alike. As with any industry, investors should be wary of too-good-to-be-true opportunities, and some basic education and diligence about bitcoin may improve understanding of this market and inoculate against certain risks. Bitcoin is a decentralized digital currency not backed by government fiat or any particular commodity, although the Commodity Futures Trading Commission has classified bitcoin as a commodity. The exchange rate of U.S. Dollars to Bitcoin (BTC) fluctuates substantially (1 BTC to $253.66 USD at the time of publication), and while economists, experts, and users contest the viability of bitcoin as a currency, a consensus supports the viability and utility of the technology underlying bitcoin, called the blockchain. The blockchain is an encrypted transaction ledger maintained by voluntarily participating networked computers, which prevent duplicative and fraudulent transactions by verifying transactions against each other on an ongoing basis. The blockchain therefore provides clearing and settlement services traditionally provided by financial institutions for a fraction of the cost.

Regardless of whether bitcoin itself survives as a currency (or commodity), many entrepreneurs see opportunity in the underlying blockchain technology. In April, Overstock.com registered $500 million worth of equity with the SEC in the form of digital securities. In its Form F-3 filing, the company disclosed that it may offer and distribute the securities using blockchain technology. See Overstock.com, Inc., Registration Statement (Form S-3) (Apr. 24, 2015). In other words, rather than registered securities trading on an exchange like the NYSE, these Overstock.com shares would trade on a custom-built blockchain designed for exchanging these digital securities over a decentralized peer-to-peer network. Whether and how the SEC will regulate these kinds of bitcoin-like securities remains to be seen, and before considering investing in digital currencies like bitcoin or developing new blockchain implementations, you should consult an attorney with experience in this area to understand the risks of and ensure compliance with the rapidly-evolving regulatory framework surrounding them.