The Securities and Exchange Commission filed a lawsuit in a US federal court in Connecticut claiming that Homero Garza’s, GAW Miners, LLC’s and ZenMiner, LLC’s (d/b/a Zen Cloud) offer and sale to investors of interests in computing power to mine virtual currency was illegal and constituted a Ponzi scheme. According to the SEC, from August through December 2014, respondents sold investment contracts to over 10,000 investors that represented shares in profits that would be generated from computing power (termed “hashlets”) they collectively purchased to mine virtual currency. In general, “miners” of some virtual currency, including Bitcoin, use increasingly powerful computers to solve complex mathematical problems and are rewarded for success by receiving newly created digital coins. Such computers also store the transaction history of all previously created digital coins on a public ledger, which, in the case of Bitcoin, is known as the blockchain. However, claimed the SEC, respondents sold interests in far more computing power than they actually had. As a result, funds raised from new investors, were sometimes used to pay off older investors. The SEC claimed that the sales by respondents of investment contracts in computing power constituted fraud and the offer and sale of unregistered securities. The SEC seeks an injunction against the defendants as well as disgorgement of profits and a fine. (Click here for information on New York State’s Bitcoin License requirements in the article, “NYDFS Issues BitLicense Framework for Regulating Virtual Currency Firms” in the June 7, 2015 edition of Bridging the Week.)