In a new twist on the regulatory status of cryptos, a Federal judge in Brooklyn has ruled that US securities law can be applied to combat fraud in the industry. The judgment from Raymond Dearie allowed the SEC to pursue its case against Maksim Zaslavskiy. However, it is still up to the jury to make a final verdict. Judge Dearie did not indicate that the coins were securities, but that the jury would decide on the status of the coins using the Howey Test.
What was the case about?
Zaslavskiy raised over USD 300,000 from investors for REcoin, which was allegedly backed by real estate, and a cryptocurrency known as Diamond, which was allegedly backed by diamonds. The prosecution indicated that both cryptocurrencies were not backed by anything. The defendant argued that the two cryptocurrencies were currencies and not securities, and thus the SEC had no jurisdiction. However, Judge Dearie rejected this argument stating that the securities law must be interpreted flexibly.
This is the first case of its kind and Judge Dearie did not mention any prior case law regarding the regulatory status of cryptocurrencies in his judgment. The SEC chair Jay Clayton had previously indicated that bitcoin and ether would not be subject to SEC regulation, but that ICOs and smaller cryptocurrencies certainly would be pursued where there was evidence of malfeasance.
Cryptos – an industry in limbo
There has been much confusion surrounding the regulatory status of cryptos and there is no end in sight. This March, a Brooklyn Judge ruled that cryptocurrencies were commodities and not securities, which would presumably put them outside of the reach of the SEC and in the hands of the Commodities and Futures Trading Commission (CFTC).
Ripple has already paid a fine to FinCEN because its token is a currency, and is currently battling lawsuits on the basis that its token (XRP) is a security. There has been no official law passed by Congress which addresses the issue directly. But this is perfectly natural, as cryptos evolve far too quickly for the regulatory systems to keep pace, with new coins being created daily which combine the attributes of currencies, commodities, securities, and properties.
The consensus right now is that major cryptos will not be regulated by the SEC and smaller ICOs will be. Additionally, bitcoin and ether are not securities, according to the latest statements from the SEC. However, there is quite a grey area for many cryptocurrencies and there are certainly no boundaries in a field that is constantly morphing.
Digital Nomad with an interest in Zen and Blockchain technology.
Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.