The US Judge has ruled a fraudulent ICO promoter case to be covered under security law. If this becomes a precedent for future cases, this can stifle the growth of the crypto market.
Fraud ICO covered under securities law
In the ruling of the case against a fraudulent ICO promoter, a federal judge rules that Initial Coin Offerings (ICO) can be covered under the securities law. The criminal case in question has been against Maksim Zaslavskiy who has been defrauding investors by promoting numerous ICOs via two of his companies. REcoin is one of the ICO scams which was marketed to investors as being backed by diamond assets and real estate when in actuality it didn’t.
Zaslavskiy’s lawyers pled for a dismissal in the grounds of ICOs being currencies and not securities but Judge Dearie refused. An excerpt from the hearing states:
“He [Zaslavskiy] argues that the securities laws are unconstitutionality vague as applied. The Government, meanwhile, asserts that the investments made in REcoin and Diamond were “investment contracts,” and thus “securities,” […] and that these laws are not unconstitutionally vague.”
Bloomberg quoted a lawyer at Chapman & Cutler LLP, Gregory Xethalis who has specialization in crypto-related issues:
“It demonstrates that you can’t rely on an argument that the law is insufficiently clear and put your head in the sand. It’s saying that operating in a grey area will not bar the court from hearing cases that allege securities laws violations in ICOs.”
Another excerpt from the ruling states:
“Zaslavskiy’s contrary characterizations are plainly insufficient to bypass regulatory and criminal enforcement of the securities laws. Because the indictment is sufficient under the Constitution and the Federal Rules of Criminal Procedure, and because the law under which Zaslavskiy is charged is not unconstitutionally vague as applied, Zaslavskiy’s motion is denied. The case will proceed to trial.”
However, this ruling by no means is a final word as the ultimate decision rests with the jury. But Judge Dearie’s ruling in this case that ICO is covered under security law can potentially impact the ICO and crypto market at large and could also become a precedent for future cases.
Curbing the market potential & growth
A few months back, this year itself, US SEC chairman Jay Clayton has said that SEC won’t be bending any rules for digital assets stating:
“We are not going to do any violence to the traditional definition of a security that has worked for a long time. “There’s no need to change the definition. A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say ‘you can get a return’[;] that is a security and we can regulate that. We regulate the offering of that security and regulate the trading of that security.”
He has also shared at that time:
“If you have an ICO or a stock, and you want to sell it in a private placement, follow the private placement rules. If you want to do any IPO with a token, come see us.”
If regulators move in guns blazing without understanding and ease would end up stifling the crypto market. It needs to be maintained that growth is not jeopardized.
If tokens are indeed recognized and treated as securities, it would lead to barriers to entry as even the wallet and exchange providers would have to get themselves registered. Moreover, it would also present an obstruction to the Investors to make entry and investment into this industry.
In its nascent stage, a free market would help the crypto industry to grow unrestricted. So, it is essential that authorities focus on the underlying technology these tokens and coins are built on and ensure the market is running smoothly along with consumers’ protection.