The Initial Coin Offering (ICO) market could be forever changed. This as a result of a court ruling in the case of U.S. V. Zaslavskiy, 17-cr-0647, a case handled by the U.S. District Court for the Eastern District of New York (Brooklyn). In that case, the judge, US Federal Judge Raymond J. Dearie, ruled the billion dollar Initial Coin Offering (ICO) industry to be under the jurisdiction of securities law.
ICOs are a fundraising mechanism used by blockchain startups that are similar to initial public offerings in equity markets. In an ICO, however, the money is raised before a product is ready for market. A team of developers and designers offer digital assets for sale that will be needed later on to access the software that’s being developed. In theory, if there is demand for that software–say a service like Uber but that is hosted on a decentralized network like the Ethereum blockchain–the coins used to access that service will be in demand and therefore rise in value.
The ruling came as part of a criminal case against Maksim Zaslavskiy, a man accused of securities fraud during two ICOs. Specifically, Zaslavskiy was involved in promoting digital currencies backed by investments in real estate and diamonds that prosecutors claimed didn’t exist. Mr. Zaslavskiy’s defense tried to establish that ICOs were not securities but instead currencies, saying that the securities law was too vague to be applied to Initial Coin Offerings, although the judge ultimately decided otherwise.
According to the judge, the government could proceed with the case under the assumption that an Initial Coin Offering was a security for purposes of applying the federal criminal law. The novelty that comes with this ruling is the fact that now the case will continue its process, leading for a jury to take part in it and determine whether or not ICOs are securities in order to continue with the trial. As of right now, allegations in the indictment would support ICOs to be under securities law. If the ruling was upheld, this could lead to set a precedent for future ICO-related cases brought by alleged victims and regulators.
Prosecutors argued that investments offered by Zaslavskiy in the two ICOs–ReCoin Group Foundation and Diamond Reserve Club–were “investment contracts” that were securities under federal securities laws. Zaslavskiy’s investors never received any digital asset, nor did he ever purchase any real estate, hire a broker for investments or sell more than 2.8 million tokens as he claimed in marketing materials, Dearie said Tuesday.
“There was no blockchain, no real estate, there were no diamonds,” Dearie told the defense at a hearing to dismiss the case in May. “It just wasn’t there. It’s a gossamer. There’s just nothing to it.”
About $18.7 billion has been raised this year by so-called ICOs, according to data compiled by Coinschedule.com. Securities and Exchange Commission Chairman Jay Clayton has said the fundraising method should be regulated, adding that he believes the market has become rife with fraud as it quickly expanded with the popularity of digital currencies and blockchains.
“This ruling affirms the SEC’s position that it has authority over ICOs and that market manipulation and anti-fraud provisions in the law apply,” Peter Henning, a professor at Wayne State University’s law school in Detroit, said in an interview. “The defense here was arguing that it’s not a security, but the judge has rejected that claim, saying that this case can fit under the securities laws, and that’s an important first step.”
There have been more than 300 ICOs launched in the first half of 2018–nearly the same amount as all of 2017. And to date, in the first six months of this year, more money has been raised. TaTaTu, a social entertainment platform, raised $575 million off the sale of its tokens. TaTaTu gives you free TTU tokens just for signing up. Rapper Akon is planning on launching his own cryptocurrency, aptly named “Akoin,” to be used in “Akon Crypto City,” which will be located in the West African city of Senegal.
Crypto invester Brian Kelly, founder and CEO of BKCM LLC, an investment firm focused on digital currencies, pointed out that the U.S. is not a big player in the ICO market. Asia, particularly countries where regulatory issues may be less of a concern, is.
Another shift: a lot of the ICOs have been funded with U.S. dollars and not cryptocurrencies. Kelly said he’s noticed a lot of investors, who were buying into the ICO craze, “are actually looking to buy ether, to buy bitcoin, to buy some of these big protocols, these platforms that everything is being built on.”