Federal Judge: Fraudulent ICO is a Security
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Federal Judge: Fraudulent ICO is a Security

What used to be the ‘Wild West’ of crypto will be no longer. For a long time, those that issued ICOs argued that they were not applicable to existing securities laws. However, with current federal cases and prosecution, their time of ambiguity may be ending.


In October, federal prosecutors filed charges against Maksim Zaslavskiy for his involved in ICOs which were said to be backed by real assets. Yet, despite raising $300,000, these ‘real assets’ were never purchased. Although Zaslavskiy argued they are not securities to begin with, Judge Raymond Dearie rejected the argument. What was the reason? Well, it is in lieu of a new way of looking at ICOs, a market that was previously almost completely unregulated is now being seen as fitting the definition of a security more concretely.

The First Case of Its Kind

The Supreme Court case S.E.C. v. Howey established a basic litmus test for “investment contracts” or securities. In effect, any security has to be an investment of money in common enterprise with someone else for the purposes of making money off other people’s efforts.

Although this definition sounds vague, it gets even vaguer when applied to ICOs. After all, Zaslavskiy argued that his tokens were not an “investment of money” but rather an exchange of one currency for another. In effect, his defense was that an ICO was merely an exchange of equal valued assets, not with the expectation of profit. However, with the promise of increased profits clear on his ICO advertisements, the judge found this defense far too narrow, but it will take a jury to decide whether or not this ICO counts as an investment contract.

Judge Drearie’s legal opinion is among the first in a federal court to raise the concern that ICOs may in fact be securities. Although the Securities and Exchange Commission issued their own report in July 2017 stating that initial coin offerings are in fact securities and therefore fall under the agency’s jurisdiction, this has yet to confirmed in law. It is likely that, if prosecuted, Zaslavskiy’s case could bolster a crackdown of fraudulent ICOs and deem them legally as securities.

There have been other cases of initial coin offering legal cases in the United States, such as against TokenLot, the so-called “ICO Superstore.” A case against was brought against it by the SEC for being an “unregistered broker.” The settlement was made which required a payout of some $480,000.

However, the opinion made by Judge Drearie is separate from this settlement. TokenLot was charged for being an unregistered broker. The case against Zaslavskiy has far greater ramifications since it has the potential to create a new legal precedent for rulings on ICOs.

Do you think ICOs should legally be considered as securities? What are your thoughts on the Zaslavskiy case? Let us know in the comments.


Image courtesy of Brooklyn Daily Eagle.

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October 2, 2018

About Author

SamBocetta Sam Bocetta is a retired security analyst with over 35+ years working in the public and private security sector advising against cyber warfare. Sam has worked with some of the largest global defense companies developing integrated systems for security and communication. Despite his previous work experience, Sam is a strong supporter and believer in decentralization.