Cryptocurrency: digital currency or security?

Instead of investing in the stock market, some individuals have turned to investing in digital currencies, otherwise known as cryptocurrency. One of the more well-known cryptocurrencies is Bitcoin.[note] What is Cryptocurrency: Everything You Need To Know [Ultimate Guide], BLOCKGEEKS, https://blockgeeks.com/guides/what-is-cryptocurrency/

[/note] As of 6:40 am on Friday, November 3, 2017, Bitcoin reached $7,454.04 per coin.[note]Ryan Browne, Bitcoin jumps $400 in one day and soars to a new record high, CNBC (November 3, 2017) https://www.cnbc.com/2017/11/03/bitcoin-price-hits-yet-another-record-high.html[/note] With the enormous impact that Bitcoin has had on the public, other cryptocurrencies have emerged. Some of the more important cryptocurrencies to keep an eye on include: Litecoin, Ethereum, Zcash, Dash, Ripple, and Monero.[note]Prableen Bajpai, The 6 Most Important Cryptocurrencies Other Than Bitcoin, INVESTOPEDIA (October 13, 2017, 11:41 AM), http://www.investopedia.com/tech/6-most-important-cryptocurrencies-other-bitcoin/[/note] But with the increase in cryptocurrencies, also come the possibility of cryptocurrencies that are scams.

Recently, Crypotcurrency has been in the news because two types of cryptocurrency have been alleged to be a scam.[note]Securities and Exchange Commission v. RECoin, et. al., SECURITIES AND EXCHANGE COMMISSION, https://www.sec.gov/litigation/complaints/2017/comp-pr2017-185.pdf (last visited November 3, 2017); SEC complaint against Zaslavskiy, SCRIBID, https://www.scribd.com/document/363232034/SEC-complaint-against-Zaslavskiy#from_embed (last visited November 3, 2017)[/note] Mr. Maksim Zaslavskiy invented these two scams- RECoin, and Diamond Reserve Club (“DRC”).[note]Aaron Elstein, Brooklyn cryptocurrency promoter charged with fraud, CRAIN’S NEW YORK BUSINESS (November 1, 2017, 3:43 P.M.), http://www.crainsnewyork.com/article/20171101/TECHNOLOGY/171109990/feds-charge-brooklyn-man-with-fraud-over-cryptocurrency-offering[/note] RECoin was a cryptocurrency that was going to be backed by real estate, while the DRC was going to be backed by physical diamonds.[note]Aaron Elstein, Brooklyn cryptocurrency promoter charged with fraud, CRAIN’S NEW YORK BUSINESS (November 1, 2017, 3:43 P.M.), http://www.crainsnewyork.com/article/20171101/TECHNOLOGY/171109990/feds-charge-brooklyn-man-with-fraud-over-cryptocurrency-offering[/note] Mr. Zaslavskiy allegedly collected at least $300,000 from investors in these two cryptocurrencies, but never did what he promised to do.[note]Brendan Pierson, New York man charged with conspiracy to defraud investors, BUSINESS INSIDER (November 1, 2017, 7:53 PM), http://www.businessinsider.com/r-new-york-man-charged-with-conspiracy-to-defraud-investors-2017-11[/note] According to both the SEC and FBI, RECoin and DRC were not backed by real estate and diamonds respectively.[note]Securities and Exchange Commission v. RECoin, et. al., SECURITIES AND EXCHANGE COMMISSION, https://www.sec.gov/litigation/complaints/2017/comp-pr2017-185.pdf (last visited November 3, 2017); SEC complaint against Zaslavskiy, SCRIBID, https://www.scribd.com/document/363232034/SEC-complaint-against-Zaslavskiy#from_embed (last visited November 3, 2017)[/note]

On September 29, 2017, the SEC filed suit against Mr. Zaslavskiy alleging violations of Section 17(a)(1)-(3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5(a)-(c), Section 5(a) of the Securities Act of 1933, and Section 5(c) of the Securities act of 1933.[note]Allen & Overy LLC, SEC files its first enforcement action against alleged sponsors of initial coin offerings, JD SUPRA (October 5, 2017), https://www.jdsupra.com/legalnews/sec-files-its-first-enforcement-action-94970/[/note] Specifically, the violation Section 5 of the Securities Act of 1933 alleges that Mr. Zaslavskiy sold unregistered securities.[note]Allen & Overy LLC, SEC files its first enforcement action against alleged sponsors of initial coin offerings, JD SUPRA (October 5, 2017), https://www.jdsupra.com/legalnews/sec-files-its-first-enforcement-action-94970/[/note] Securities include things like stocks, but also investment contracts.[note]15 U.S.C. § 77(b)(a)(1) (2017)[/note] An investment contract is a monetary investment in a common enterprise with profits earned through the efforts of others.[note]SEC v. Howey, 328 U.S. 293, 298-99 (1946); SEC v. Glenn W. Turner Enterprises, 474 F.2d 476, 481-82 (9th Cir. 1973).[/note]

Following the lead of the SEC, on October 27, 2017, the United States Attorney for the Eastern District of New York filed criminal charges against Mr. Zaslavskiy alleging fraud, specifically conspiracy to commit securities fraud.[note]SEC complaint against Zaslavskiy, SCRIBID, https://www.scribd.com/document/363232034/SEC-complaint-against-Zaslavskiy#from_embed (last visited November 3, 2017)[/note] Ultimately, United States v. Zaslavskiy and Securities and Exchange Commission ultimately turn on whether or not the SEC or US Attorney can prove that RECoin and DRC are considered “Securities” under the Securities Act of 1933, and Securities Exchange Act of 1934. The repercussions of these cases will be felt by the cryptocurrency world because cryptocurrency will either need to be regulated like the stock market, or it can continue to be unregulated.

For those interested in keeping up to date on the developments of the two cases, United States v. Zaslavskiy can be at case number 17-mj-0934 in the Eastern District of New York,, and Securities and Exchange Commission v. Zaslavskiy can be found at case number 1:17-cv-05725 in the Eastern District of New York.[note]Securities and Exchange Commission v. RECoin, et. al., SECURITIES AND EXCHANGE COMMISSION, https://www.sec.gov/litigation/complaints/2017/comp-pr2017-185.pdf (last visited November 3, 2017); SEC complaint against Zaslavskiy, SCRIBID, https://www.scribd.com/document/363232034/SEC-complaint-against-Zaslavskiy#from_embed (last visited November 3, 2017)[/note]