US judge says that initial coin offerings may be covered by securities laws, ruling in favour of government

A federal judge has ruled that US securities laws may cover an initial coin offering, handing the government a legal victory in its effort to regulate billions of dollars in cybercurrency offerings much like stocks.

The ruling came in a criminal case against a man charged with promoting digital currencies backed by investments in real estate and diamonds that prosecutors said didn’t exist. US District Judge Raymond Dearie in Brooklyn, New York, said on Tuesday that the government can proceed with a case alleging that an initial coin offering is a security for purposes of federal criminal law.

About US$18.7 billion has been raised this year by so-called ICOs, according to data compiled by Coinschedule.com. Securities and Exchange Commission Chairman Jay Clayton has said the fundraising method should be regulated, adding that he believes the market has become rife with fraud as it quickly expanded with the popularity of digital currencies and blockchains.

“This ruling affirms the SEC’s position that it has authority over ICOs and that market manipulation and anti-fraud provisions in the law apply,” Peter Henning, a professor at Wayne State University’s law school in Detroit, said in an interview. “The defence here was arguing that it’s not a security, but the judge has rejected that claim, saying that this case can fit under the securities laws, and that’s an important first step.”

The New York case, which prosecutors said was the first criminal prosecution of its kind, involves Maksim Zaslavskiy. The Brooklyn businessman was charged with conspiracy and two counts of securities fraud for his role in allegedly defrauding investors in two initial coin offerings. He’d argued that the ICOs at issue weren’t securities but instead currencies. Zaslavskiy also said securities law was too vague to be applied to initial coin offerings.