Hartford Business Journal

www.HartfordBusiness.com September 7, 2015 • Hartford Business Journal 13 Quality Construction + Butler Manufacturing = Repeat Customers www.borghesibuilding.com © 2011 BlueScope Buildings North America, Inc. All rights reserved. Butler Manufacturing™ is a division of BlueScope Buildings North America, Inc. 2155 East Main Street • Torrington, Connecticut 06790 317–321 Federal Road, Brookfield, CT | 2005 | 31,000 sq ft 270–290 Federal Road, Brookfield, CT 2002 | 33,000 sq ft 227-235 Federal Road, Brookfield, CT 2014 | 25,000 sq ft Contact us at 1-855-BUILD-86 or visit us on the web. 273 Hebron Avenue, Glastonbury 860-934-1300 chelseagroton.com New neighborhood, same tried-and-true lending solutions. CT regulates cryptocurrency from page 1 bank. The rising popularity of digital cur- rencies, the most recognizable being Bit- coin, has led to a push for additional oversight at the state and federal levels. Connecticut legislators recently passed a law that represents the state's first substan- tial attempt to license and regulate busi- nesses that transmit virtual currencies. Though online discussion forums like Reddit, BitcoinTalk.org and GetHashing. com are rife with posts from GAW custom- ers who feel they were scammed, govern- ment authorities have not accused the com- pany of committing any crime. However, the U.S. Securities & Exchange Commission recently confirmed in a court filing that it's investigating whether GAW — which was arguably the only prominent Connecticut-based cryptocurrency operator — broke federal securities laws when selling its virtual currency mining services and Pay- coin, which it launched in December. GAW has also been hit by several civil lawsuits this year, including one in Hart- ford, court records show. Bitcoin, Paycoin and numerous other cryptocurrencies are created by a decen- tralized group of computers, or "miners," that solve complex equations to generate new digital currency for users. That process also tracks, verifies and records transactions. Those who buy mining computers hope the digital currency will gain in popular- ity and value, earning them an investment return. At first, GAW sold actual mining hard- ware but switched to a virtual model, accord- ing to court documents. Instead of receiving and running their own equipment at home, customers would instead purchase from GAW what amounted to a share of the profits in GAW'S own mining operation, which was based at a server farm in Mississippi. Civil suits According to a July lawsuit filed in Hart- ford Superior Court, Robert Zappullo of Geor- gia and Albert Aviles of Virginia purchased from GAW $10,000 worth of mining hardware called Vaultbreakers, which had promised unprecedented computation speeds. But when GAW failed to deliver that hard- ware, the company convinced Zappullo and Aviles — using allegedly misleading informa- tion — to instead invest the money into sev- eral new offerings, including a virtual mining service called Hashlets, as well as Paycoin, court records said. GAW CEO Homero Joshua Garza told the Wall Street Journal in December that his company brought in $120 million in rev- enue in the second half of 2014, partly from the sale of Hashlets. Reached by email, Garza declined to com- ment on the civil suits or the SEC investigation. The Hartford suit also alleged that GAW originally promised Paycoin's value would never fall below $20. But that price floor was quickly breached, and Paycoin now trades for just pennies on several exchanges. The suit also alleges that Zappullo and Aviles were frozen out of their online Pay- coin wallets for several days in January, and that the company stole more than $130,000 worth of Paycoins from them. They say some customers who found they had miss- ing Paycoins got them back, but others didn't. The two men claimed $229,899 in total damages and on July 22 a judge award- ed a $205,000 pre-judgment remedy. GAW did not respond to a summons to appear in court for the suit, records show. Hartford attorney Andrew D. O'Toole, who represents Zappullo and Aviles, declined to comment on the case or what additional damages his clients might seek. GAW also didn't respond to a court sum- mons in Mississippi, where a federal judge in August awarded a utility company near- ly $347,000 for unpaid power bills sent to GAW's mining computer server farm in that state, according to court filings. States begin to regulate Connecticut recently joined several other states in creating new laws to regu- late cryptocurrency companies. Bruce Adams, general counsel for the state Department of Banking, which advo- cated for the law, denied that regulators had GAW Miners in mind specifically when they helped draft the language. Rather, Adams said their main concern was determining how to let digital currency com- panies operate in Connecticut responsibly. But he acknowledged that GAW raised challenging regulatory questions. "We're not going to comment on the com- pany itself or the specific litigation, but the fact that a company like this raised issues from securities law to consumer credit law and every stop in between demonstrates the need for this industry to be safely and appropriately regulated," Adams said. Connecticut's law, which takes effect Oct. 1, will require money transmitters who do business in the state to disclose whether they are transmitting virtual currency. Until now, the state has had no way of knowing. Connecticut has nearly 100 licensed money transmitters, which include payroll companies or financial services providers, like Western Union. The new law will also give the banking commissioner expanded authority when reviewing a virtual currency transmitter's license application. For example, an other- wise qualified applicant could still be denied if the commissioner believes the company will create too much financial risk to consumers. The commissioner would also be able to set a bond and other requirements for a licensee, based on his interpretation of their business model. One cryptocurrency advocate and think tank, however, isn't pleased with the law. Peter Van Valkenburg, research direc- tor of Coin Center, a Washington, D.C. non- profit, said the banking commissioner's expanded powers creates legal uncertainty for companies that may be faced with shift- ing requirements from one state to the next. "If a law is drafted too broadly, it could be used to sweep up entities into the licens- ing regime," Van Valkenburg said. Adams said the agency has no intent to hinder new business models in the state. He said the law will better inform the department about virtual currency activity, allowing the agency to respond appropriately. "We wanted to crack open the door and let some of these companies in on a case-by- case basis to see how they operate," he said. "As a regulatory matter, we don't want to stand in the way of financial businesses." n

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