Securities Laws Can Apply to Cryptocurrencies Says Federal Judge

A New York federal judge has ruled that U.S. securities law can be used to prosecute fraud cases over cryptocurrency offerings reports Reuters.


A New York federal judge has ruled that U.S. securities law can be used to prosecute fraud cases over cryptocurrency offerings reports Reuters.

The ruling came during a case against the founder of REcoin and Diamond coin, allegedly real estate and diamond-backed coins, respectively.

The defendant’s lawyers requested that the charges be dismissed as REcoin and Diamond are currencies and should not be subject to the Securities Exchange Act.

However, the request was denied by the judge, who explained that the law must be interpreted “flexibly”, presumably to protect investors.

Securities Laws can apply to cryptocurrencies

In a court case against Brooklyn resident Maksim Zaslavskiy, which alleges that he raised at least $300,000 last year from investors in a cryptocurrency called REcoin.

Maksim Zaslavskiy claimed REcoin was backed by real estate, and another cryptocurrency called Diamond, which he said was backed by diamonds.

Zaslavskiy was arrested in November 2017, on charges that he defrauded investors in two the cryptocurrencies (REcoin and Diamond), thus, violating the federal Securities Exchange Act.

Prosecutors said that no real estate or diamonds backed Zaslavskiy’s REcoin. In March, Zaslavskiy’s lawyers responded by filing a motion to dismiss with the presiding federal judge, Raymond Dearie.

The defendant’s lawyers argued that REcoin and Diamond were currencies, not securities, and therefore not covered by the Securities Exchange Act.

In what appears to be the first U.S. court case to address the matter of security laws and cryptocurrencies, District Judge Raymond Dearie ruled that U.S. securities laws may apply to the prosecution of crypto fraud allegations.

U.S. Federal Securities laws should be interpreted ‘flexibly’

On Tuesday, September 11, U.S. District Judge, Raymond Dearie ruled that the case can continue, but that some flexibility should be allowed in the application of existing federal securities laws to crypto.

The ruling came after Zaslavskiy’s lawyers unsuccessfully moved to drop the suit, claiming cryptocurrencies didn’t fall under the Securities Exchange Act.

In a statement cited by the Financial Times, Judge Raymond Dearie wrote:

“The question is whether the ‘elements of a profit-seeking business venture’ are sufficiently alleged in the indictment, such that, if proven at trial, a reasonable jury could conclude that ‘investors provide[d] the capital and share[d] in the earnings and profits; [and] the promoters manage[d], control[ed] and operate[d] the enterprise.’ For present purposes, we conclude that they are.”

Judge Dearie further stated that it would be up to the jury to make the final decision.

He added that Zaslavskiy’s lawyers will be able to make their case in court that the aforementioned tokens should be considered currencies, making securities laws not applicable.

Cryptocurrency and regulations

The regulation of cryptocurrencies is still in its early stages, and Congress has not passed any laws addressing it directly. Cryptocurrencies continue to operate in a legal grey area, free from regulation.

In the past, the U.S. Securities and Exchange Commission considered applying federal securities laws to everything from cryptocurrency exchanges to digital asset storage companies known as wallets.

Judge Dearie noted that the U.S. SEC, which prosecutes civil securities fraud, has previously confirmed it considers some cryptocurrencies to be securities.

Reuters reported that Dearie’s statement and other filings in Zaslavskiy’s case did not mention any similar court decisions on applying federal securities law to crypto-related fraud cases.

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