Regulators Won’t Hesitate to Shut Down the Smallest of Bitcoin Startups

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Mixed emotions are often found in the audience during the regulatory panel at any Bitcoin conference. While it’s important for individuals involved in the industry to be practical when it comes to regulation, the reality is that a large chunk of individuals involved in Bitcoin don’t want to be regulated at all.

Many Bitcoin startups have complained about the regulations that have already impacted the industry in various jurisdictions around the world, and New York’s BitLicense may be the best example of regulatory action that has not been well received by the digital currency community.

At the recent Blockchain Agenda Conference in San Diego, the panel on Bitcoin regulation made it clear that startups in this space need to get all of their ducks in a row before implementing a business plan in this highly-regulated industry.

Do Things Right from the Start

One of the key points that all panel members continually hit throughout the discussion on Bitcoin regulation is that startups need to do things right from the start, as to not give regulators a chance to shut down their businesses. Although many of the largest Bitcoin companies of today have decided to go the extra mile when it comes to compliance, this was definitely not the case in the early days of the industry.

Brian Klein, who provides legal counsel to a variety of Bitcoin and blockchain companies, discussed the point that startups need to be compliant with regulations early on in their existence during the panel discussion. He explained:

“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.”

Even the Smallest Bitcoin Startups Can Be Shut Down

Regulatory action against Bitcoin companies is also not theoretical. Although Silk Road and Mt. Gox seem to get most of the Bitcoin-related attention in the media, there are also small startups that have been crushed by regulation. Jason Seibert, who defended Trendon Shavers in the infamous case of Bitcoin Savings and Trust, described one such example during the regulation panel at Blockchain Agenda San Diego: Sand Hill Exchange.

Sand Hill Exchange is a fantasy stock market of sorts that allows users to compete with each other on their ability to pick winning startups before they go public. This was not necessarily a company built on top of the Bitcoin blockchain, but the startup did allow users to bet real money on startups via the digital currency. This addition of real money to the equation essentially turned the website into a pre-IPO stock exchange.

Seibert described the brilliance behind Sand Hill Exchange during the panel discussion:

”It’s a brilliant idea. 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, and that’s the entrepreneurial spirit — that’s a good spirit to have.”

Having said that, the SEC shut down the website for running an unauthorized exchange. At the time of receiving a cease-and-desist letter from the SEC, only $5,400 had been raised by the site. Seibert then discussed his reasoning for bringing up the story of Sand Hill Exchange:

”The point I want to make [with that story] is it doesn’t matter what the dollar amount is. 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.”

Sand Hill Exchange were fined $20,000 by the SEC, and they are also banned from ever selling securities.

Slow Down and Hire a Consultant

Although it may not be a surprise to hear a panel of attorneys and legal experts claim that more Bitcoin startups should pay for legal counsel early on in the development of their business plans, it’s clear that many entrepreneurs have been burned in the past for not prioritizing regulatory compliance. 

Before moving onto another topic of discussion, Jason Seibert offered some final words of advice for any future startup founders in the audience:

“If you just take a moment to slow down and, as Brian [Klein] 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.”