A federal judge ruled [text, PDF] Tuesday that US securities laws may cover an initial coin offering (ICO), allowing the government to regulate billions of dollars in cybercurrency.
The ruling came in the criminal case of US v. Zaslavskiy [text, PDF] where Zaslavskiy is charged with promoting digital currencies backed by investments in real estate and diamonds that prosecutors said did not exist. US District Judge Raymond Dearie said that a reasonable jury could find that Zaslavskiy’s ICO is a security for purposes of federal criminal law.
Zaslavskiy lawyers argued that securities laws are unconstitutionally vague as applied to the defendant. However, Dearie stated that “Congress’ purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called. … The fact that simply labeling an investment opportunity as ‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract—a security—into a currency.”
ICOs are a fundraising mechanism used by blockchain startups that are similar to initial public offerings in equity markets. After an ICO is launched, interested investors buy into the offering, either with a fiat currency or with preexisting digital tokens. In exchange for their support, investors receive a new cryptocurrency token specific to the ICO. The new currency is fluid and dependent upon the start-ups success.
Federal regulators have urged investors to be cautious with ICOs. Because these fundraising operatives are not currently regulated by financial authorities such as the SEC, funds that are lost due to fraudulent initiatives may never be recovered.