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Trial Date Set In Critical ICO Case, Judge Weighs Legal Classification Of Cryptocurrencies



De Silva

In a criminal case involving two allegedly fraudulent initial coin offerings (ICOs), a jury trial is set for January 2019. However, the judge presiding over the case has not yet ruled on the defense’s motion to dismiss, which argues unconstitutional vagueness and a lack of jurisdiction. The question: do securities laws clearly apply to the defendant’s ICOs?

On May 8, 2018, Judge Raymond Dearie held a proceeding in the criminal case of the United States v. Maksim Zaslavskiy. According to Tuesday's minutes, the defense argued that the case should be dismissed due unconstitutional vagueness and a lack of jurisdiction. Essentially, lawyers for Zaslavskiy contended that securities laws do not apply to the initial coin offerings (ICOs) that their client undertook – and even if securities laws do apply, they are too unclear to be valid in this instance.

The judge's determination will carry great importance to the cryptocurrency community, as entrepreneurs and regulatory stakeholders wait to see whether sales of some blockchain-based tokens are subject to federal securities laws. For what it's worth, at a February 2018 Senate hearing, Securities and Exchange Commission (SEC) chairman Jay Clayton said, "I believe every ICO I've seen is a security."

If Judge Dearie denies the motion to dismiss, the ruling could indicate that many ICO executives must abide by the registration and filing requirements that are necessary in the stock market. That said, such a ruling in the case – which deals with the sale of tokens that were supposedly backed by physical assets – might not offer clear insight into ICOs for intangible assets or possible new markets (consider how Airbnb and Uber have changed market structures for the travel industry). The potential for innovative developments and the international nature of these intangible products could make the application of US securities law a major headache.

Last month, venture capitalists, including Andreessen Horowitz and Union Square Ventures, apparently told regulators that tokens are not necessarily investments, but can be products in and of themselves. Earlier this year, Alex Rampell, a general partner at Andreessen, suggested that through ICOs, tokens (like those distributed for blockchain-based storage platform Filecoin) offer an opportunity to simulate the network effect. Early adopters could benefit from the increase in the price of a token, he said, but at some stage, the financial benefit of holding a token may be outstripped by the token's utility, or what service it allows a user to access.

The possible dual nature of crypto-assets is something that came up during Tuesday's proceeding. Considering whether cryptocurrencies could be commodities or securities, Judge Dearie asked, "Is it possible that it's both?" He added, "Don't panic, but we are in a new world here."

The court reserved decision on the defense's motion to dismiss and scheduled a trial date of January 7, 2019. Judge Dearie said he needed to review how the allegations against the defendant measure up against the "Howey Test," the guidelines for determining designation as a security.

Len Kamdang, one of Zaslavskiy's lawyers, argued that cryptocurrencies are in "a novel class" and that "it's very difficult to apply securities laws to this asset," noting that another judge in the same court found that bitcoin was appropriately under the jurisdiction of the Commodity Futures Trading Commission (CFTC).

The government warned that the defense was inappropriately grouping all crypto-assets under a single label.

"It would be nice if the regulators got into the 20th century, much less the 21st," said Judge Dearie. "But I have to deal with the cards that have been dealt to me." He also weighed in on the apparently non-existent tokens that were peddled by the defendant, who was present on bond. "There is no blockchain, there is no real estate, there were no diamonds," said Dearie. "It was a grand misrepresentation. It just wasn't there. It's a gossamer, there's nothing to it."

At the very heart of the case is Maksim Zaslavskiy, a 38-year-old Ukrainian-born businessman. According to the Department of Justice's criminal complaint, which was unsealed in November 2017, Zaslavskiy stands accused of "securities fraud conspiracy in connection with engaging in illegal unregistered securities offerings and fraudulent conduct and misstatements designed to deceive investors as part of two Initial Coin Offerings (ICOs)."

The defendant allegedly conducted two ICOs using companies REcoin and Diamond Reserve Club, but the tokens that he promoted were part of a sham investment scheme that falsely claimed backing by real estate and diamonds.

In September 2017, ETHNews reported when the Securities and Exchange Commission filed civil charges against Zaslavskiy.

The criminal case United States v. Maksim Zaslavskiy is taking place in the United States District Court for the Eastern District of New York (Case No: 1:17-cr-00647-RJD-RER).

Matthew De Silva

Matthew has a passion for law and technology. He graduated from Georgetown University, where he studied international economics and music. Matthew enjoys biking and listening to tech podcasts. He lives in Los Angeles.

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