Bitcoin regulation divides audiences at industry conferences. Some entrepreneurs embrace compliance requirements. Others reject any government oversight. Disagreements over regulation have intensified
Bitcoin regulation divides audiences at industry conferences. Some entrepreneurs embrace compliance requirements. Others reject any government oversight. Disagreements over regulation have intensified as governments tighten their approach. New York's BitLicense became synonymous with regulatory overreach in the digital currency community.
At the Blockchain Agenda Conference in San Diego, a panel of lawyers and regulators hammered home one message: startups need compliance built in from the start, not added later. Waiting to address regulatory issues doesn't work. The SEC doesn't care about company size or stealth. Companies that think they'll fly under the radar often get surprised.
Brian Klein, a lawyer representing Bitcoin and blockchain companies, told the panelists: "I think very early on it's important to consult with an attorney about your business model. Explain the business model to the attorney. This is an incredibly regulated space. It's really important that you do the right thing from the get-go."
Today's Bitcoin companies operate with compliance teams and legal staff as standard practice. The industry's early days were different. Startups lacked these resources and saw no need to spend money on lawyers. Some founders paid dearly for that mistake.
Jason Seibert, an attorney who defended Trendon Shavers in the Bitcoin Savings and Trust case, told the panel about Sand Hill Exchange. The site operated as a fantasy stock market where users bet on which startups would thrive before their IPOs. Players wagered real money in Bitcoin to build their hypothetical portfolios. That detail turned it into a securities exchange in the SEC's eyes.
"It's a brilliant idea," Seibert said. "You had a PhD, you had a master's degree from MIT. These were smart people that went from the basement in their pajamas to live and running in mere hours. That's the entrepreneurial spirit, that's a good spirit to have."
The SEC disagreed with that assessment. They sent a cease-and-desist letter to Sand Hill Exchange. At the time the letter arrived, the site had raised just $5,400 in total. A Financial Times blogger had written about the platform days earlier, and that coverage caught the SEC's attention. The SEC fined the company $20,000 and barred it from selling securities.
Seibert used the Sand Hill Exchange story to make a specific point: the SEC doesn't distinguish between tiny startups operating on shoestring budgets and established companies with massive user bases.
"The point I want to make with that story is it doesn't matter what the dollar amount is," Seibert said. "It doesn't matter if you just think, 'Well, I'm small or it's still too early. They'll never know I'm here.' Within two days of a Financial Times blogger blogging about this pre-IPO program that had just been released, they got a cease and desist letter from the SEC."
No entrepreneur should be shocked to hear lawyers recommend hiring legal counsel. Yet many have learned the hard way that skipping this step costs dearly. Seibert's final words to the panel audience: "If you just take a moment to slow down and, as Brian said, talk with an attorney or some consultant right from the beginning, you can maybe get a path or a direction on how you can leverage your product the right way without being barred from entering the product into the market in the future."
