SEC Labels Third-Party Bitcoin Mining a ‘Security’ in $48M Fraud Bust

The U.S. Securities and Exchange Commission says some third-party Bitcoin mining hosting deals can amount to securities, according to a federal lawsuit tied to an alleged $48 million fraud involving mining firm VBit Technologies.

In a complaint filed Wednesday in the U.S. District Court for the District of Delaware, the SEC accused VBit founder and former CEO Danh C. Vo of misleading thousands of investors.

Regulators claim the company sold unregistered investment contracts linked to hosted Bitcoin mining operations.

Source: SEC

At the center of the case are so-called “Hosting Agreements” promoted by VBit between late 2018 and early 2022. The SEC says the contracts were pitched to retail investors as a largely hands-off way to generate passive income through Bitcoin mining.

Why the SEC Says VBit’s Mining Contracts Were Securities

Bitcoin mining typically involves running specialized computers to validate transactions on the Bitcoin network in exchange for newly minted coins.

The SEC alleges Vo used the technical complexity of the process to promote a turnkey model in which investors were told they owned mining rigs that would be pooled and operated entirely by VBit.

Returns were marketed as proportional to each investor’s share of computing power, or hashrate.

According to the complaint, nearly all of VBit’s customers entered into these Hosting Agreements, which were sold in tiered packages ranging from lower-cost plans to premium offerings that purportedly included up to eight mining rigs.

Investors were encouraged to choose hosted mining rather than operating equipment themselves through discounted pricing, longer contract terms, and promises of steady returns without operational involvement.

The SEC alleges those representations were false. Court filings state that VBit sold far more hosting agreements than it had the mining equipment to support.

In 2020, the company allegedly sold agreements covering more than 3,300 rigs while operating fewer than 1,000.

In 2021, agreements reportedly covered more than 8,400 rigs, while only 1,643 were in operation.

As a result, the hashrate promised to investors could not be delivered.

The agency further alleges that investors never owned or controlled specific mining equipment and were entirely dependent on Vo and VBit’s operations to generate profits.

On that basis, the SEC argues the Hosting Agreements meet the definition of investment contracts under the Supreme Court’s Howey test and therefore should have been registered as securities.

Investors Locked Out as SEC Says Mining Firm Moved Funds Offshore

Under U.S. law, an arrangement can be deemed a security if investors contribute money to a common enterprise with a reasonable expectation of profits derived primarily from the efforts of others.

The SEC claims VBit’s hosting model satisfies all four elements, placing it within federal securities rules governing registration, disclosure, and anti-fraud protections.

The complaint also accuses Vo of fabricating investor account balances through an online portal that displayed hypothetical mining returns unrelated to actual Bitcoin production.

The bitcoins that were mined were allegedly controlled exclusively by Vo.

The SEC says that between December 2020 and November 2021, Vo transferred approximately $48.5 million of investor funds to personal accounts, distributed millions to family members, and used investor money for cryptocurrency trading.

After learning of the SEC’s investigation in 2021, Vo allegedly left the United States. VBit later announced it had been sold to an entity called Advanced Mining Group, which the SEC describes as a shell company used to maintain the appearance of ongoing operations.

By mid-2022, investors were locked out of their accounts.

The SEC is seeking permanent injunctions, disgorgement, civil penalties, and a ban preventing Vo from serving as an officer or director of a public company. A jury trial has been requested.