The Department of Justice and the SEC rebuffed claims by the issuer of two allegedly fraudulent initial coin offerings that U.S. securities laws are “unconstitutionally vague” as applied to cryptocurrencies.
Instead, the government argues, in dual filings submitted to a federal court on March 19, the ICOs in question “comfortably fit” within the parameters of existing U.S. securities laws.
In September 2017, the SEC charged Maksim Zaslavskiy with defrauding investors in two ICOs, REcoin and DRC World (or Diamond Reserve Club), which claimed to be backed by investments in real estate and diamonds.
The SEC alleged that Zaslavskiy sold “unregistered securities, and the digital tokens or coins being peddled don’t really exist,” a news release says. In November, the Justice Department filed a criminal complaint against Zaslavskiy.
In February, Zaslavskiy’s legal team filed a motion to dismiss the indictment, arguing that cryptocurrencies are exempt from securities regulations as currencies and because they do not represent investment contracts.
In addition, the motion argued, the statutes upon which the government’s charges are based, as applied to cryptocurrencies, are void for unconstitutional vagueness.
Both the DOJ and SEC pushed back against those claims in the filings submitted on March 19 in U.S. District Court for the Eastern District of New York.
The agencies argued that both of the digital tokens Zaslavskiy issued fall within the limits of the Howey Test, a 1946 Supreme Court ruling that established the criteria for determining what is a security.
The filings come as the government ratchets up its involvement in the cryptocurrency sector. On March 15, a senior SEC official confirmed that the agency has opened “dozens” of investigations in the cryptocurrency sector.
“Now facing prosecution for securities fraud, the defendant claims that his ‘investment opportunity’ was no investment at all — it was just a sale of a currency backed by a commodity, first real estate (REcoin) and then diamonds (Diamond),” the DOJ wrote.
“The defendant’s arguments do not hold water in light of the allegations in the indictment and controlling law.”
Zaslavskiy “simply engaged in old-fashioned fraud dressed in a new-fashioned label,” the SEC wrote in its filing.
The court has yet to issue a ruling on the government’s memorandum, according to the case docket. Federal defender Mildred Whalen, an attorney representing Zaslavskiy, declined to comment to VCJ, saying that she will file a reply on Monday, April 26.
Action items: Read the defendant’s motion to dismiss, and the DOJ and SEC’s responses below.
Disclosure: Kaitlyn Bartley and her husband own cryptocurrencies, including Ripple’s XRP.
Photo of Bitcoin and other virtual money courtesy of iaremenko/iStock/Getty Images.