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Security or Currency? Jury to Decide Next Year in ICO Fraud Case

A jury will decide whether tokens issued through two allegedly fraudulent initial coin offerings (ICOs) count as securities, a U.S. district court judge said Tuesday.

Businessman Maksim Zaslavskiy is accused of violating anti-fraud and registration provisions of federal securities laws after launching two token sales that officials say defrauded investors.

He pled not guilty in early December to the charges, before moving to dismiss the cases brought by the Securities and Exchange Commission (SEC) and Department of Justice, arguing that the token sales did not constitute securities offerings. He further argued that he did not know he was in violation of the law.

In response, the DOJ and SEC claimed that Zaslavskiy knew his actions were unlawful, if for no other reason than because the SEC contacted him prior to the DRCW token sale. Furthermore, the agencies claimed that both the REcoin and DRCW tokens passed the Howey Test, meaning they fit the legal definition of securities offerings.

Zaslavskiy’s trial is potentially precedent-setting, considering that it hinges on a key question: whether his issuance of tokens across two ICOs constituted illegal securities offerings.

But the answer to that question, Tuesday’s hearing made clear, could take months to develop. Judge Raymond Dearie didn’t rule directly on the question of whether the tokens involved are securities, kicking that question to the trial, which is tentatively set to begin as early as January 2019.

Jury members will decide “whether this is a currency or a security,” Dearie remarked.

Vagueness argument continued

Yet Zaslavskiy’s legal team is continuing to push the argument that the rules, as they exist today, are too vague.

In remarks during the hearing, Zaslavskiy’s legal team accused the U.S. government of sending mixed signals on how ICO tokens are to be classified, with one attorney stating that “the government has ruled that virtual currencies are commodities and now the government is saying they’re securities … the SEC wants to regulate something.”

“The fact that on the same floor, in the same court in Brooklyn, New York, the government is saying different things based on which agency is bringing the charge, that brings vagueness,” the attorney added.

For its part, the government put forward the idea that the two tokens in question can’t be considered currencies as they never actually existed. They were only promised to would-be investors.

“This wasn’t a currency at this point, in time maybe. Maybe at some point down the road, in ten years, but at this time it is not a currency,” one prosecutor said. And as the argument was later framed: “Defense is trying to group all cryptocurrencies into one big ball of wax [but] you can’t group all cryptocurrencies together.”

While the SEC has not issued formal guidance on ICOs, chairman Jay Clayton has repeatedly stated in public appearances his belief that every ICO token he’s seen is a security.

In a now somewhat-famous statement during an event at Princeton University in April, Clayton used an analogy to explain how he viewed token sales.

“If I have a laundry token for washing my clothes, that’s not a security,” he remarked. “But if I have a set of 10 laundry tokens and the laundromats are to be developed and those are offered to me as something I can use for the future and I’m buying them because I can sell them to next year’s incoming class, that’s a security.”

Courtroom image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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US Government to Submit 'Oversized' Argument in ICO Fraud Case

U.S. prosecutors are planning an “oversized” response to a motion to dismiss in an ongoing – and potentially precedent-setting – initial coin offering (ICO) fraud lawsuit.

As previously reported by CoinDesk, Maksim Zaslavskiy has been accused of committing securities fraud in connection with two ICOs, RECoin and Diamond Reserve Club World. In September of last year, the U.S. Securities and Exchange Commission (SEC) filed suit, and in November Zaslavskiy was arrested and charged by the Department of Justice (DOJ). That move led to the SEC suit being stayed pending the outcome of the DOJ action, and Zaslavskiy has pled not guilty to the allegations.

Now, Zaslavskiy is seeking to have the lawsuit dismissed on the argument that tokens sold through an ICO aren’t considered securities. The SEC has said differently, and the case has set the stage for a U.S. federal court to weigh in on the question of whether token sales can be considered securities offerings.

Ahead of that decision, the Department of Justice is set to submit a memorandum of law that is expected to rebut the defense’s claim.

According to a letter dated March 14, that filing is expected to exceed the maximum size allowed by the court for such arguments, necessitating a request for an exception. While the letter from U.S. Attorney Richard Donoghue doesn’t offer any clues as to the exact details of the government’s argument, the move signals that the filing in question will be a significant one.

“The defendant raises a number of arguments in his brief regarding the dismissal of the indictment. The government does not have the benefit of a reply and intends to provide the Court with a complete picture of the facts that are directly relevant to both, the facial attack on the indictment and to constitutional vagueness,” Donoghue wrote.

Donoghue asked for permission to file as many as 40 pages, though he said that the department would aim to keep the filing – which Zaslavskiy has consented to – beneath that limit.

The deadline for the DOJ’s filing is Monday, March 19.

Justice statue image via Shutterstock

Read the letter here:

Letter for Exemption by CoinDesk on Scribd

Read Zaslavskiy’s Motion to Dismiss here:

Motion to Dismiss by CoinDesk on Scribd

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.