In a recent legal action, the U.S. Securities and Exchange Commission (SEC) indicated that certain third-party Bitcoin mining hosting services may fall under securities regulations. A prominent industry figure believes, however, that the majority of providers need not be alarmed.

The SEC has initiated a lawsuit against the Bitcoin mining firm VBit and its founder, Danh Vo, in a Delaware federal court, alleging fraudulent activities and the misappropriation of approximately $48 million in investor funds from 2018 to 2022 due to selling more hosting agreements than mining rigs available.

“VBit’s Hosting Agreements are investment contracts and therefore securities,” the SEC argued, asserting that these contracts fulfill the conditions set forth by the Howey test for defining securities.

A highlighted excerpt of the SEC’s lawsuit claiming VBit’s hosting agreements are securities. Source: SEC

The SEC claimed that investors believed they would earn passive income and relied entirely on VBit’s efforts to generate profits, stating that these investors lacked control or ownership over the mining rigs they had essentially bought.

Furthermore, the SEC’s stance represents a notable continuation of enforcement practices that appeared during the Biden administration, which advocates for regulating a wide array of cryptocurrencies and businesses under securities laws.

VBit Allegedly Lacks Industry Standards

The SEC also criticized Vo’s operation, suggesting it did not adhere to common industry protocols, making it challenging for investors to monitor their rigs, while VBit maintained comprehensive operational control.

Additionally, the SEC asserted that VBit directed its hashrate to a mining pool it controlled, a crucial aspect influencing the SEC’s classification of VBit’s hosting agreements as securities.

“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.”

Industry Outlook Unaffected

Mitchell Askew from Blockware Intelligence expressed to Cointelegraph that pooling hashrate is not a standard practice for hosted Bitcoin mining service providers.

“Hosted Bitcoin mining simply means a client purchases a computer and electricity,” Askew asserted. “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 has not yet provided an immediate comment regarding this matter. The Commission’s interpretation suggesting that hosted Bitcoin mining may constitute a security stands in contrast to support given to the industry during the Trump administration.

Numerous major crypto investigations launched under the Biden administration have since been dismissed, although various fraud-related lawsuits remain active.