By: Cameron Bowen, 13 September 2018

ICO Fraud Tied to Securities Law in US |

For months, the United States has been waffling about how to classify and regulate ICOs. Should we think of digital tokens and coins as currencies or securities, legally speaking. Some have suggested creating a third category, just for cryptocurrencies.

Whatever the future holds for ICO regulation, a recent court ruling hints at a likely outcome. The US Stock Exchange Commission (SEC) has issued judgments against three ICOs from last year, all of which are now widely accepted as scams.

Maksim Zaslavskiy, defendant in a case against his 2017 RECoin and DRC ICOs, has argued that these tokens are “Currencies”, thus falling outside the purview of the SEC. If Zaslavskiy’s legal team were to be successful with this argument, the SEC’s cases could have been thrown out.

Unfortunately for the fraudster, a New York state judge ruled that the ICO operators could be charged with securities fraud (an umbrella term for various sorts of infraction). To put simply, this is very bad news for Mr. Zaslavskiy. 

This ruling could have ripples that affect more than just this case. The SEC is apparently creating cases against “dozens” of 2017 and 2018 ICOs. By some counts, 81% of all ICOs that occurred during these months were scams.

This ruling could also have ramifications for all other ICOs. The fact that the judge allowed ICOs to be classified as securities in this case doesn’t mean that the SEC has blanket license to rule against ICOs as securities in all other cases. But it does set an important precedent.

In all likelihood, we’re about to see a geyser of legal wrath wrought upon ICOs from last year. Fraudsters will be quaking in their boots. This case also makes it more likely that the ICO will issue blanket regulations for ICOs as securities, at some time in the not-too-distant future.

ICOs as securities would have myriad new strictures imposed upon them. Tax law for investor profits would be formalised. It’s quite possible that ICOs, as we know them, could never occur again. It’s also possible that the SEC won’t do anything of the sort.

The instant P2P funding riches for new companies, plus the 10X+ profits for ICO investors, couldn’t last forever. This too-good-to-be-true funding model is in a period of flux. The SEC has been hesitant to formally regulate this space, so that they don’t impede innovation.

More likely, they’ll try to attack fraudsters piecemeal, to scare off ICO scammers. But if these actions are insufficient, this recent legal case could give precedent for declaring all ICOs to be subject to securities law. No one knows what happens after that.

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