US judge rules crypto fraud cases can be prosecuted under securities laws
A New York district judge has broken the regulatory deadlock in the US by ruling that current securities laws can be applied to cases of cryptocurrency fraud.
The ruling came after a Brooklyn court heard Judge Raymond Dearie declare that government prosecutors could proceed with charges against a man alleged to have promoted digital currency projects backed by investments in diamonds and real estate that did not exist.
Brooklyn resident Maksim Zaslavskiy is charged with defrauding investors in two scam coin projects, but his lawyers claimed that the case should be dropped on the grounds that cryptocurrencies do not come under the regulatory oversight of the Securities and Exchange Act.
Indeed, the Securities and Exchange Commission (SEC), the regulator responsible for policing the Act, has repeatedly said that cryptocurrencies are not securities and, therefore, do not come under its regulatory authority.
SEC chairman Jay Clayton said in June that he did not consider bitcoin a security, although initial coin offerings should be considered as securities. The issue of cryptocurrency regulation has lacked clarity ever since.
Judge Dearie ruled on Tuesday that securities laws should be interpreted “flexibly”, dismissing the defence lawyers motion to have the case dropped.
He wrote in a statement, quoting the Howey test – the US standard definition of whether a financial product is a security:
“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.”
Zaslavskiy is alleged by prosecutors to have fraudulently gained at least $300,000 from investors in 2017 for a cryptocurrency called REcoin that was purported to be backed by real estate and diamonds than never existed.