Yes, A Cryptocurrency Can Be a Security

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Earlier this week, a federal judge denied a claim that a cryptocurrency is not a security under the federal securities law. The judge didn’t say that it was a security. Instead, he ruled that a reasonable jury could conclude that the cryptocurrency is a security.

This ruling comes from the SEC enforcement action against RECoin, the first cryptocurrency backed by real estate. It wasn’t really. RECoin never hired a broker, lawyer, or developer to acquire the real estate investments advertised in the offering of RECOin.

Maksim Zaslavskiy, the principal behind RECoin, is not strongly arguing that there was not a problem with RECoin. At this point he’s arguing that it’s not a securities problem and the SEC should leave him alone.

The ruling is not surprising. The Securities and Exchange Commission has been saying for months in public announcements and enforcement actions that ICO tokens can be securities. (although the SEC did say that Bitcoin and Ether are no longer securities.)

This one federal court judge has agreed with the SEC on this, so one point to the SEC.

The judge jumped right into the Howey test and the definition of an “investment contract.” That is a “contract, transaction, or scheme whereby a person [1] invests his money [2] in a common enterprise and [3] is led to expect profits solely from the efforts of the promoter or third party.”

As for the first prong, Zaslavskiy argued that the parties did not invest money in RECoin. They merely transferred from one medium of currency to another. The judge notes that money does not necessarily mean cash, any exchange of value is enough.

In the second prong, giving out tokens instead of stock or bonds does not make it any less a common enterprise. The tokens were supposed to be pooled to invest in real estate.

The marketing materials serve up the third prong. They pitched the RECoin as an attractive investment opportunity which grows in value. There was no element of control given to the token holders.

Zaslavskiy argues that RECoin should be considered a currency, which falls outside the definition of a security.

“He also overlooks the fact that simply labeling an investment opportunity as “virtual currency” or “cryptocurrency” does not transform an investment contract—a security—into a currency.”

The judge found no basis behind the argument, because no real estate, coins, tokens or currency of any sort ever existed in the enterprise.

It’s slowly coming, but people will start going to jail for these fraudulent coin offerings.

Sources:

Author: Doug Cornelius

You can find out more about Doug on the About Doug page

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