Judge Says US Securities Law Applies To Crypto Fraud Cases

A federal judge has ruled that prosecutors can move forward with a case against a man accused of defrauding investors in two cryptocurrencies. According to Reuters, U.S. District Judge Raymond Dearie in New York ruled that Brooklyn resident Maksim Zaslavskiy can be prosecuted for violating the federal Securities Exchange Act.

Prosecutors allege that Zaslavskiy raised at least $300,000 last year from investors in two cryptocurrencies: one called REcoin, which he said was backed by real estate, and the other called Diamond, which he claimed was backed by diamonds. However, prosecutors revealed that neither crypto was backed by either real estate or diamonds.

In March, Zaslavskiy’s lawyers asked Dearie to dismiss the charges, arguing that REcoin and Diamond were currencies, not securities, and should not be covered by the Securities Exchange Act. However, the judge rejected that request, writing on Tuesday (Sept. 11) that the federal securities law must be interpreted “flexibly.”

The judge also pointed to the U.S. Securities and Exchange Commission (SEC) ruling earlier this year, saying that while some well-known cryptocurrencies like bitcoin and Ethereum are not securities, the coins offered during initial coin offerings (ICOs) very likely are entirely — or mostly — securities. As such, they can expect to come under the regulatory control of the SEC and relevant securities laws.

“Central to determining whether a security is being sold is how it is being sold, and the reasonable expectations of purchasers,” said William Hinman, the SEC’s head of the Division of Corporate Finance, at the time.

The specific issues hinge on the buyer’s expectations for the coin when purchased and whether the buyer expects that the coin will result in a payout from a third party (presumably from whom a buyer purchases the coin). Simply put: If coin buyers are looking for a return on their asset, it is safe to assume the SEC will rule that piece of crypto a security.