A federal judge in New York just gave the Securities and Exchange Commission a potentially big victory, ruling that initial coin offerings can be regulated by U.S. securities laws.
U.S. District Judge Raymond Dearie in Brooklyn, New York ruled “that the government can proceed with a case alleging that an initial coin offering is a security for purposes of federal criminal law,” as Bloomberg reports. The ruling could provide significant ammunition to SEC Chairman Jay Clayton, who said at a Senate committee hearing on cryptocurrencies in February that the agency could seek new legislation to help enforce oversight of the of the crypto space, including ICOs.
Judge Dearie’s ruling came in a case in which the SEC had charged a Brooklyn businessman named Maksim Zaslavskiy and two of his companies with “selling unregistered securities, and the digital tokens or coins being peddled don’t really exist.” Investors in Zaslavskiy’s two companies – REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) – were allegedly “told they can expect sizeable returns from the companies’ operations when neither has any real operations.”
It should be noted that Judge Dearie’s ruling – while bolstering the government’s argument for regulation – does not guarantee that the SEC will ultimately get the green light to regulate ICOs, as Bloomberg notes.
In his ruling Tuesday, the judge said it will ultimately be up to the jury to decide whether the ICO at issue was a security, but the allegations in the indictment would support such a finding. The judge’s decision focused on the particulars of Zaslavskiy’s alleged ICOs, and not on other ICO transactions, but if upheld on appeal, the ruling could have broader ramifications.
“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,” Dearie said in his ruling. “Simply labeling an investment opportunity as a ‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract — a security — into a currency.”
The SEC released a bulletin last year warning investors about the potential risks associated with initial coin offerings. At the Senate committee hearing in February, Clayton shed light on his views of cryptocurrencies in general, questioning the value of Bitcoin and other digital coins.
“There are a lot of smart people who think there is something to the value of the cryptocurrency and the international exchange,” he told the committee. “I am not seeing those benefits manifesting themselves in the marketplace yet. I look at this from the perspective of protecting Main Street investors and they should understand that.”
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