ICOs are Covered by Securities Law, US Judge Rules

The judge wrote that the securities law needs to be interpreted “flexibly”.

A United States federal judge ruled on Tuesday that US securities law can be used when prosecuting fraud cases over initial coin offerings (ICOs). In what appears to be the first court decision of its kind in the country, the ruling gives the government a legal victory in its efforts to regulate cryptocurrency offerings.

The ruling came from US District Judge Raymond Dearie in Brooklyn in regard to a criminal case against Maksim Zaslavskiy. Zaslavskiy is charged with advertising two ICOs backed by investments in real estate and diamonds, which prosecutors say never existed.

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In November last year, Zaslavskiy, a Brooklyn resident, was arrested on charges that he scammed investors in two cryptocurrencies – REcoin and Diamond – which is in violation of the federal Securities Exchange Act. Altogether, prosecutors have said that he made at least $300,000 through the two ICOs last year.

Back in March this year, Zaslavskiy’s lawyers asked the judge to dismiss the charges. They argued that the two cryptocurrencies were currencies and not securities. Therefore, they are not covered by the Securities Exchange Act.

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Securities law needs to be interpreted “flexibly”

However, on Tuesday, Dearie said that the government can continue with the case, stating that an ICO is a security and can be prosecuted under the federal criminal law. Specifically, he wrote that the law needs to be interpreted “flexibly”. He also noted that the Securities and Exchange Commission (SEC) has also stated that it categorises some cryptocurrencies as securities.

In his ruling, Dearie said: “Per the indictment, no diamonds or real estate, or any coins, tokens, or currency of any imaginable sort, ever existed — despite promises made to investors to the contrary. Simply labeling an investment opportunity as a ‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract — a security — into a currency.”

Although Dearie’s judgement is only related to ICOs in this specific case, his decision could have wider ramifications. Regulating cryptocurrencies has been a complex issue for lawmakers across the world.

Another Brooklyn federal judge ruled in March that virtual currencies could be regulated as commodities by the US Commodity Futures Trading Commission (CFTC). However, Congress is yet to pass any laws addressing digital assets directly.

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