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Cryptocurrency fraud cases may now be fought under U.S. securities laws, as a New York court ruled on September 11, 2018, during a court hearing.

The Fraudster Strikes

As reported by Reuters, U.S. District Judge Raymond Dearie made the decision while hearing a case against Maksim Zaslavskiy, after the latter defrauded two investors under the premise of a diamond-backed cryptocurrency.

The hearing marked the first such instance of a legal court in the U.S. adhering to financial securities laws to address cryptocurrencies, an attempt to clear the confusion surrounding the asset class’ legal status.

In 2017, Maksim allegedly won the confidence of two retail investors and gained over $300,000 from his exploits selling REcoin, a cryptocurrency he claimed was backed by real estate and precious stones.

However, the investors soon realized the blatant scam when no real-world asset was found to back the token’s value. Later, federal investigations confirmed their horrors.

While Judge Dearie stated the jury would ultimately make a final decision on REcoin’s legal status, the defendant’s lawyers were free to present their argument of considering the tokens as a crypto-”currency,” making securities laws inapplicable.

Crypto“currencies” and Crypto“assets”

The pioneer cryptocurrency Bitcoin was created as a cryptographic store-of-value and means-of-payments, with other digital currencies appearing in late years to capitalize on Bitcoin’s ideologies.

However, cryptocurrencies like Ethereum, VeChain, and Tron – which arrived after 2015 – were not envisioned as a “currency” by their creators, instead, thought of as a representation of an underlying dataset that could be used to access services and products on their respective networks. With time, the term cryptocurrency grew to include tokens, which did not necessarily represent a substitute for fiat.

After the wave of platform tokens, asset-backed tokens began appearing on the crypto-market, leading lawmakers to question their status as a “currency” or a tokenized “asset.” With this, the term cryptocurrency was split into several other classifications, such as crypto-tokens and crypto-assets, to define their function in a digital currency ecosystem clearly.

But, authorities have historically placed strict rules with regards to real-world assets being traded as a mere contract, equity, or security, that represents the underlying asset. Thus, it’s no surprise that several cryptocurrencies were soon frowned upon by the U.S. government, which by 2018 seemingly considers all cryptocurrencies – except Bitcoin and Ethereum – as securities.

“Flexibility” to Access Crypto

Keeping in mind the points as mentioned above, Judge Dearie ruled that federal security laws have a “flexible” interpretation, and dismissed suggestions from Maksim’s lawyers that all charges against their client be dropped as REcoin did not fall under the Securities Exchange Act.

Judge Dearie wrote in a statement:

“The question is whether the ‘elements of a profit-seeking business venture’ are sufficiently alleged in the indictment, such that, if proven at trial, a reasonable jury could conclude that ‘investors provide[d] the capital and share[d] in the earnings and profits; [and] the promoters manage[d], control[ed] and operate[d] the enterprise.’ For present purposes, we conclude that they are.”

The defendants did not cite any other instance of applying federal securities laws to cryptocurrency fraud cases.

While the ruling may not set a new benchmark for treating crypto-fraud cases, it proves that U.S. authorities are not wholly against cryptocurrencies, and may enact security laws over the asset class shortly.