ICOs are Covered by Securities Law, US Judge Rules

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.

In November last year, Zaslavskiy, a Brooklyn resident, was arrested on charges that he scammed investors in two Cryptocurrencies Cryptocurrencies By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw Read this Term - REcoin and Diamond - which is in violation of the federal Securities Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term 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.

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.