The US Securities and Exchange Commission has flagged in a lawsuit that third-party Bitcoin mining hosting services can be a securities offering, a position strongly opposed by one industry executive.
The SEC sued the Bitcoin (BTC) mining company VBit and its founder, Danh Vo, in a Delaware federal court on Wednesday, accusing them of fraud and misappropriating around $48 million in investor funds between 2018 and 2022 by selling a greater number of hosting agreements than there were mining rigs.
“VBit’s Hosting Agreements are investment contracts and therefore securities,” the SEC claimed, arguing that VBit’s investment contracts meet the criteria of the securities-defining Howey test.
“Investors who purchased Hosting Agreements did so with the expectation of earning passive income and relied exclusively on VBit’s efforts to earn a profit as the investors did not possess, control, or have agency over the mining rigs they purportedly purchased,” the agency claimed.
The SEC’s claim is a rare hangover from how the agency approached enforcement under the Biden administration, which crypto backers have said lumped most cryptocurrencies and businesses under securities laws.
VBit didn’t follow industry standards, SEC alleges
The SEC claimed that Vo’s Bitcoin mining hosting operation fell far short of standard industry practices, with investors unable to track their rigs, and the company retaining full operational control.
VBit also directed hashrate into a mining pool under its control, which appeared to be a defining factor in the SEC’s classification of VBit’s hosted Bitcoin mining agreement as a security.
In the filing, the SEC said: “The fortunes of each investor were purportedly tied to the fortunes of other investors because every investor’s chance of earning a profit was tied directly to the performance of the greater VBit mining pool, and the more investors recruited into the mining pool, the greater the chances of earning more Bitcoins.”
SEC’s view shouldn’t impact hosted Bitcoin mining industry
Mitchell Askew, the head of Blockware Intelligence, told Cointelegraph that pooling hashrate isn’t industry practice for hosted Bitcoin mining service providers.
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“Hosted Bitcoin mining simply means a client purchases a computer and electricity,” he said. “There’s no pooling of capital, no profit-sharing, and no reliance on a promoter to generate returns. Under the Howey test, that is very clearly not a security.”
“I don’t think this affects the hosted mining industry at all. Legitimate hosted mining has no resemblance to an investment contract, and this theory has no legs to stand on.”
The SEC did not immediately respond to a request for comment.
The SEC’s view that hosted Bitcoin mining can constitute a security is one of the most notable classifications under the Trump administration, which has positioned the SEC to be more supportive of the industry.
Several high-profile crypto investigations that the agency started under the Biden administration have since been dropped, however, many fraud-related lawsuits are ongoing.
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