SEC makes first fraud charges against an ICO

For the first time, the US securities regulator has issued fraud charges in connection with the practice of initial coin offerings, or ICOs.

The Securities and Exchange Commission has accused Maksim Zaslavskiy of defrauding investors through a pair of ICOs he misrepresented as backed by investments in real estate and diamonds.

Mr Zaslavskiy told investors in his two companies that they could expect large returns from their operations, which would be funded by the proceeds of the ICOs – despite these operations being non-existent, according to the SEC.

ICOs are a controversial method of raising capital by creating coins or tokens using the blockchain technology which underpins Bitcoin.

The name references the initial public offering (IPO) of companies which list on publicly traded stock markets, but sees companies issue digital coins tied to their own value instead of shares.

Mr Zaslavskiy sold REcoin to investors claiming it was backed by real estate and had raised up to $4m (£2.9m) from investors, when the real figure was closer to $300,000 (£223,000).

His numbers were “simply not true” according to the SEC’s complaint, which noted that the REcoin tokens had never been developed.

It is the first time that fraud charges have been issued against an initial coin offering, but while Mr Zaslavskiy hadn’t even developed REcoin, a functional cryptocurrency wouldn’t necessarily make the offer legitimate.

“Investors should be wary of companies touting ICOs as a way to generate outsized returns,” said Andrew Calamari, director of the SEC’s New York Regional Office.

“As alleged in our complaint, Zaslavskiy lured investors with false promises of sizeable returns from novel technology.”

Earlier this year, ICOs were declared illegal by the People’s Bank of China, the nation’s securities regulator, due to concerns regarding financial fraud and general criminal activity.

Scepticism has risen in recent months as more startups have begun to turn to ICOs as a fundraising mechanism, despite the risk of “pump-and-dump” scams as well as the lack of regulatory protections leading to alleged frauds.

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