On Tuesday, September 11, a New York Federal Judge rejected a defendant’s argument that he cannot be prosecuted because the digital coins he sold were not securities.

Maksim Zaslavskiy is accused of making materially false and fraudulent representations in connection with two investment schemes and ICOs for REcoin Group Foundation, LLC (“REcoin”) and DRC World, Inc. (“Diamond”).  Zaslavskiy claimed that REcoin and Diamond did not involve securities and were therefore beyond the reach of the federal securities laws.  At the heart of Zaslavskiy’s argument was that the digital coins he was selling were “currencies” and therefore by definition not securities.

U.S. District Judge Raymond Dearie ruled that Zaslavskiy’s characterization of the REcoin and Diamond did not remove them from the reach of federal securities law.  Judge Dearie said as follows:”The label Zaslavskiy chooses to attach to the alleged scheme does not control our analysis … [n]or does it camouflage the core nature of his alleged criminal endeavors. Stripped of the 21st-century jargon, including the defendant’s own characterization of the offered investment opportunities, the challenged indictment charges a straightforward scam, replete with the common characteristics of many financial frauds.”

Significantly, the court did not make a holding on whether ICOs are securities.  Rather,  Judge Dearie said, it would be up to a jury to determine whether REcoin and Diamond qualified as investment contracts, and therefore securities, under the test laid down in SEC v. Howey, Co.  Zaslavskiy’s case is one of several enforcement actions being watched, on both the criminal and civil side, that could lead to a formal decision by the courts that certain digital coin offerings are considered securities.

Amusingly, it’s worth noting that Zaslavskiy argued also that federal securities laws were “unconstitutionally vague” as applied to cryptocurrencies.  Judge Dearie said the relevant statutes and rule, and judicial interpretations thereof, as well as regulatory guidance, provide sufficiently clear standards to eliminate any risk of arbitrary enforcement of the securities laws in the case.  Dearie went on to say that Zaslavskiy’s contrary characterizations were plainly insufficient to bypass regulatory and criminal enforcement of the securities laws.