US again confirms tight-regulation of cryptocurrencies

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By Daniel Livingston, Partner and Scott Colvin, Lawyer

A recent New York State Court decision has reaffirmed the broad powers of US regulators to prosecute the cryptocurrency space.

Judge Raymond Dearie rejected an application to dismiss charges of fraud brought against Maksim Zaslavskiy by the New York State Attorney after Mr Zaslavskiy’s lawyers claimed that cryptocurrencies are not securities within the scope of the US Securities Exchange Act.

The case sets a strong precedent that ICOs and other cryptocurrency offerings can be pursued for fraud and similar breaches under US securities law.

The New York attorney’s office brought the charges after Mr Zaslavskiy told potential investors that his tokens (‘REcoin’ and ‘Diamond’) were backed by real estate and diamonds, respectively.

Prosecutors allege that the real estate and diamonds do not exist.

Mr Zaslavskiy purportedly received in excess of US$300,000 from investors for the tokens in 2017.

This case follows previous decisions and SEC commentary that US cryptocurrency offerings fall within the regulatory scope of both the US Securities and Exchange Commissions (SEC) and Commodity Futures Trading Commission (CFTC), and likely heralds an increased focus by those regulators on cryptocurrency fraud.

Other securities-related crimes, such as insider trading and Ponzi/pyramid schemes, may also come to be targeted by the SEC and CFTC.

The spectre of greater scrutiny around the minutiae of activity (for example, the details of white papers, the conduct of those running ICOs) is likely to spook cryptocurrency companies into moving future operations away from the US (and other more stringently-regulated jurisdictions).

As has been widely predicted in the industry, cryptocurrency-friendly jurisdictions such as Malta, Switzerland and Singapore will be the beneficiaries of this shift, with regulators in those countries showing a greater willingness to work with industry insiders together with market leaders and treat cryptocurrencies as a distinct asset class best suited to distinct rules and regulations.

We believe these ‘bespoke’ endeavours will ultimately result in a greater balance between encouraging innovative technologies and financial products and protecting consumers/investors wishing to be involved in the market. It is our view that such an approach will also no doubt produce more certainty around the prosecution of cases like that of Mr Zaslavskiy.

The ‘wild west’ days of cryptocurrencies are certainly reaching their end. However, the cryptocurrency journey has just begun. The path may be starting to play out differently but there is no doubt that crypto still remains the future. In our mind, increasing regulation actually gives the asset class more legitimacy and more mainstream appeal. This simply highlights the need for professional, experienced advice moving forward.

For further information, please do not hesitate to contact us.

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    M&A/Corporate Advisory

    Corporate Advisory Bulletin February 2019