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SEC Files Fraud Charges Against Two ICOs

Posted  October 2, 2017

By the C|C Whistleblower Lawyer Team

An article in Fortune describes an announcement by the SEC on Friday that it had brought charges against the creator of two “Initial Coin Offerings” known as “ICOs.” An ICO uses a technology platform first used by Bitcoin to sell tokens that are equivalent to shares in a company. The tokens are entirely digital and the SEC indicated in a July bulletin that ICO tokens may be considered securities.

Maksim Zaslavskiy is the owner of the ICOs REcoin and DRC and it is in relation to the operation of these entities that he was charged. According to the SEC, neither ICO had any real operations, namely, neither ICO made actual investments on behalf of investors who bought the digital tokens. The ICOs also allegedly misrepresented the total level of investment. The SEC also said that the digital tokens the ICOs were selling did not even exist. This implies that the two ICOs were not actually running on blockchains and therefore could not even be considered ICOs. Blockchain technology is a type of cloud-ledger system that digitally logs and tracks the sale of the tokens.

This appears to be the first such SEC fraud charge against an ICO. Zaslavskiy alleged advertised REcoin as “the first ever cryptocurrency backed by real estate.” DRC was the “Diamond Reserve Club” and allegedly claimed to be backed by investments in diamonds. Both companies were advertised as full companies with staff, lawyers, and working relationships with retailers among others.

Despite the charges, the SEC is not aiming to shut down ICOs in general or curtail blockchain technology. There are arguments in favor of blockchain technology because of its potential applications in supply chain tracking related to multiple parties. Also the July SEC bulletin saw some potential application or value in ICOs due the labelling of ICO tokens as potential securities. The crux of this case appears to be centered on the fact that the ICOs in question were defrauding investors rather than that the ICO system is a failure as a whole. Time will tell how the future of ICOs will be affected by this fraud case.

Tagged in: Cryptocurrency, Securities Fraud,