A court in the USA has today ruled that tokens sold during ICOs count as securities under federal law, according to Bloomberg, which stated in an article that “Federal prosecutors won a key legal victory when a judge ruled that U.S. securities laws cover initial coin offerings.”
But that’s not strictly accurate.
What U.S. District Judge Raymond Dearie actually said that was that existing federal legislation on securities could cover token sales, at least in criminal cases, but that the final decision was not his.
The news came after the judge refused to throw out a criminal suit brought in Brooklyn, New York City, against a man who was charged with fraudulent practices. The defendant’s company sold tokens claiming they were backed by assets including diamonds and real estate, which turned out not to be the case.
However, the Judge continued by clarifying that a final decision would be made by a jury, and that the defendant could argue at trial over whether the tokens were currencies, not securities. This was omitted from Bloomberg’s reporting.
Cited as one of the first criminal cases of its kind, the ruling could have significant repercussions on how America’s financial regulators handle cryptocurrency issues in the future. Tokenized securities are, for the most part, already covered under existing financial regulation; they include clear responsibilities on the part of token issuers to provide potential investors with relevant information and can be held accountable for the irresponsible use of investor’s money.
Bloomberg has a reputation for running wild stories about cryptocurrencies. Moderators on the popular Reddit sub r/cryptocurrency took the unusual step of labeling the Bloomberg headline ‘misleading’ as the article rose to the top of the sub.
James Blakemore of blockchain law firm Blakemore Fallon and Ketsal Consulting was one of many commentators who wasn’t buying Bloomberg’s story: “The court’s order denied a pretrial filing known as a “motion to dismiss”—here, the defendant moved to dismiss the government’s indictment against him. At this early stage, the court was called on to decide only whether the government’s allegations, assumed for now to be true, set forth a crime. Any evidence that the alleged scheme was, in fact, a securities offering made in violation of the law will be provided at a later date. Only then will a jury or the court decide what actually happened in this case, including the status of the ICOs.”
Kendrick Nguyen of Republic explained that “This ruling should have no implications on non-fraudulent crypto projects seeking funding. The reason Judge Dearie is bringing the hammer down on the defendants, in this case, is due to the fact that the defendant was running a fraudulent securities offering. Zaslavskiy was offering digital tokens in both a supposed Real Estate and Diamond equity business. In no way was the structure of these digital tokens tying investors to any stake in either of these businesses.”
The debate on whether cryptocurrencies should be counted as securities has been raging since the start of the year, with Ripple’s XRP and Ether (ETH), particularly in the spotlight. A lot hinges on the token sale itself. The logic goes that if projects promised or alluded to high returns for potential investors then under the Howey Test, this would count the token as a security.
Although the Securities and Exchange Commission concluded earlier this year that Ether’s token sale did not meet the criteria for it to be counted as a security, Ripple’s lawyers are still trying to convince judges in California that it did not suggest investors would make speculative gains from buying its XRP tokens.
Today’s court ruling could be a spanner in the works for utility token sales. Or it could help clarify that tokens are, in fact, currencies.
Clarity is what the sector needs, so the news today should be welcomed by crypto enthusiasts.
The author is invested in digital currencies, including some that are mentioned here.