The regulatory framework for virtual currencies is evolving, as federal and state regulators and courts wrestle with the circumstances in which cryptocurrencies are securities. For instance, the staff of the Securities and Exchange Commission (“SEC”) has observed that tokens, which start as securities, can become something other than a security over time as a token’s network becomes “sufficiently decentralized.” In fact, the SEC staff indicate that more comprehensive yet “plain English” guidance will be forthcoming before the end of this year. In the meantime, we highlight a recent court case considering the question. In U.S. v. Zaslavskiy, a federal court considered whether a cryptocurrency can be regarded as a security. That case involved criminal charges against Maksim Zaslavskiy accused of promoting digital currencies backed by investments in real estate and diamonds that prosecutors said did not exist. The U.S. District Judge in New York decided that the prosecutors could proceed with their case alleging that the cryptocurrencies at issue were securities for purposes of federal criminal law.
Prosecutors argued that investments offered by Zaslavskiy in two initial coin offerings (“ICOs”)—REcoin Group Foundation and Diamond Reserve Club—were “investment contracts” that were securities under the federal securities laws. Zaslavskiy, on the other hand, filed a motion to dismiss the prosecutors’ securities fraud claims, arguing that the virtual currencies promoted in the ICOs are “currencies,” and therefore, by definition, not securities.