The U.S. Securities and Exchange Commission has suggested in a lawsuit that third-party Bitcoin mining hosting services may constitute a securities offering, a position strongly rejected by an industry leader.
The SEC sued Bitcoin (BTC) mining company VBit and its founder Danh Vo in federal court in Delaware on Wednesday, accusing them of fraud and misappropriation of about $48 million in investor funds between 2018 and 2022 by selling a bigger variety of hosting arrangements than there have been mining rigs.
“VBit’s hosting agreements are investment contracts and subsequently securities,” the SEC claimed, arguing that VBit’s investment contracts meet the standards of the security-defining Howey test.
A highlighted excerpt from the SEC's lawsuit alleging that VBit's hosting agreements are securities. Source: SEC
“Investors who purchased hosting agreements did so with the expectation of earning passive income and relied solely on VBit’s efforts to make a profit, because the investors didn’t own, control, or get rid of the mining equipment they purportedly purchased,” the agency alleged.
The SEC's claim is a rare holdover from the best way the agency handled enforcement under the Biden administration, which crypto supporters say has brought most cryptocurrencies and firms under securities laws.
VBit didn’t adhere to industry standards, the SEC claims
The SEC alleged that Vo's Bitcoin mining hosting operations fell far short of ordinary industry practices because investors couldn’t track their rigs and the corporate retained full operational control.
VBit also funneled hashrate right into a mining pool it controlled, which was apparently a key consider the SEC's classification of VBit's hosted Bitcoin mining protocol as a security.
In the filing, the SEC said: “Each investor's wealth was allegedly tied to the wealth of other investors because each investor's likelihood of winning was directly depending on the performance of the larger VBit mining pool, and the more investors recruited to the mining pool, the greater the possibilities of earning more Bitcoins.”
The SEC’s view shouldn’t have any impact on the hosted Bitcoin mining industry
Mitchell Askew, head of Blockware Intelligence, told Cointelegraph that hashrate pooling shouldn’t be an industry practice for hosted Bitcoin mining service providers.
“I don’t think this impacts the hosted mining industry in any respect. Legitimate hosted mining has nothing to do with an investment contract and this theory has no basis.”
The SEC didn’t immediately reply to a request for comment.
The SEC's view that hosted Bitcoin mining may constitute a security is one of the crucial notable rulings under the Trump administration, which has positioned the SEC to offer greater support for the industry.
Several high-profile crypto investigations the agency launched under the Biden administration have now been closed, but many fraud lawsuits remain ongoing.
