Winklevoss twins file plan for Bitcoin public offering
NEW YORK — In what is believed to be the first Bitcoin-related securities offering, the Winklevoss twins want to give investors a piece of the virtual currency, whose growing popularity has caught the eye of entrepreneurs and regulators alike.
But while all public offerings come with a degree of uncertainty, the investment vehicle — akin to an exchange-traded fund — involving Bitcoins brings its own unique risks, analysts say.
What could go wrong with the investment proposed by Cameron and Tyler Winklevoss, former Harvard classmates of Facebook co-founder Mark Zuckerberg? Plenty, according to their securities filing.
Eighteen of the filing’s 74 pages, or about a quarter, address “risk factors” facing prospective investors. The twins are looking to raise about $20 million, according to the filing.
Bitcoins were created by an anonymous programmer in 2009. They have no backing of any government. Their value has proved highly volatile. Exchanges on which Bitcoins trade have been hacked.
Shares in the Winklevoss Bitcoin Trust “are designed for investors seeking a cost-effective and convenient means to gain exposure to Bitcoins with minimal credit risk,” according to a prospectus filed with the U.S. Securities and Exchange Commission on Monday.
Such filings often contain a parade of potential worst-case scenarios that have little chance of ever coming to fruition, but they can highlight the unique challenges facing a business — including one in the fast-evolving frontier of digital currency.
For one, the filing notes how Bitcoins are used more by speculators than “in the retail and commercial marketplace.” That could lead to price volatility, and “adversely affect” investors, the filing said.
And Bitcoins’ libertarian appeal may also invite potential losses.
The Bitcoin system includes a series of protocols that run across a wide number of servers around the world for regulating the creation and trading of Bitcoins. People can get Bitcoins either by buying them with traditional currency or by “mining” them. The mining process involves solving complex computing puzzles that reward a person with Bitcoins.
But, as the filing notes, the exchanges on which Bitcoins trade are “largely unregulated and may therefore be more exposed to fraud and failure.”
Hackers, malware and sabotage could threaten the Bitcoin trading network, endangering an investment, the filing noted. Despite safeguards put in place, a security system is “not impenetrable and may not be free from defect,” it said.
And if something happens, the filing noted, “the Trust may not have adequate sources of recovery if its Bitcoins are lost, stolen or destroyed.”
Perhaps one of the biggest risks is how governments around the world will try to regulate the burgeoning digital currency.
In the U.S., officials have become increasingly concerned about how digital currencies in general could be used to launder money from illegal activities.
“It may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoins in one or more countries, and ownership of, holding or trading in [shares of the trust] may also be considered illegal and subject to sanction,” the filing stated.
In the last year, several U.S. regulatory agencies has taken aggressive enforcement actions against Bitcoin-related businesses.
Earlier this year, the Homeland Security Department shut down a U.S.-based unit of a Japanese Bitcoin trading platform. And in May, the Seattle-based Bitcoin Foundation, which recently held a conference on the virtual currency in Silicon Valley, received a cease-and-desist letter from California’s Department of Financial Institutions warning the organization not to conduct any monetary transmissions without proper licensing.
The Winklevoss twins declined to comment.
Jim Angel, a finance professor at Georgetown University, said the risk factors are “very different” from those in a typical prospectus.
“Here what you have is a speculative vehicle that is based on a digital currency of uncertain provenance and uncertain future,” Angel said. “We have a new technology here that is untried. According to some people, it has a great deal of promise. According to some other people, it will soon be in the dustbin of history.... Time will tell which view is correct.”
