Cryptocurrency

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The issue of whether the sales of digital assets constitute investment contracts (and therefore securities) remains at the forefront of SEC regulatory issues. Yesterday, in SEC v. Terraform Labs, a federal judge in New York rejected a fellow judge’s recent ruling in SEC v. Ripple Labs[1] that XRP was not a security when sold to the public on secondary markets.

On Monday, U.S. District Judge Jed Rakoff denied Terraform Labs’ motion to dismiss an SEC enforcement action.[2] In that case, the SEC alleged that Terraform Labs and its founder, Do Kwon, defrauded investors and sold digital assets in unregistered securities offerings. In its motion to dismiss, Terraform Labs argued that purchasers of UST did not have an expectation of it being an investment. In allowing the SEC’s case to proceed against Terraform Labs and Kwon, Judge Rakoff declined to follow the recent ruling in SEC v. Ripple.Continue Reading Federal Court in Terraform Labs Rejects Ripple Decision

Hollywood martial arts sensei Steven Seagal was recently karate-chopped by the SEC for his alleged undisclosed payments for Twitter-touting a security that was being offered and sold in an initial coin offering.  In a settled cease-and-desist order, the Moscow-based B movie actor consented to a violation of Section 17(b) of the Securities Act of 1933,…

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.”[1]  In fact, the SEC staff indicate that more comprehensive yet “plain English” guidance will be forthcoming before the end of this year.[2]  In the meantime, we highlight a recent court case considering the question.  In U.S. v. Zaslavskiy[3], 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.[4]  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.[5]
Continue Reading Federal Court Evaluates When Cryptocurrency May Constitute a Security in a Criminal Case