Some ICOs Can Be Considered Securities Under US Law, Federal Judge Rules

Bitcoin, Blockchain and the Law, News, Regulation | September 12, 2018 By:

US securities laws cover some initial coin offerings (ICO), a federal judge has ruled, opening the door for increased government regulation of domestic ICOs.

In US V. Zaslavskiy, 17-cr-0647, U.S. District Court for the Eastern District of New York (Brooklyn), a man was charged with promoting digital currencies backed by investments in real estate and diamonds. Prosecutors contended those assets did not exist.

US District Judge Raymond Dearie in Brooklyn, New York, said Tuesday that the government can proceed with a case alleging that an ICO is a security for purposes of federal criminal law.

Ian King, a former hedge fund manager now senior analyst for Banyan Hill Research, said that, in this case, “It is clear that cryptocurrency was issued as a security, but the jury is still out on the utility token asset class.”

In the New York case, Maksim Zaslavskiy was charged with conspiracy and two counts of securities fraud for his role in allegedly defrauding investors in two initial coin offerings. Zaslavskiy claimed the ICOs weren’t securities, but were currencies. Zaslavskiy also claimed securities law was too vague to be applied to initial coin offerings.

A jury will ultimately decide whether the ICO was a security. But the judge noted in his ruling,  “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.”