First Initial Coin Offering Fraud Case Ends in Guilty Plea

(Bloomberg) -- The first fraud prosecution involving initial coin offerings ended in a guilty plea when a New York man admitted lying to about 1,000 investors.

Maksim Zaslavskiy, 39, told a judge he sought to raise money for two ICOs backed by investments in real estate and diamonds that didn’t exist -- a scam the U.S. called an "old-fashioned fraud dressed in a new-fashioned label."

"I, along with others, made these false statements to obtain money from investors,” he said Thursday in federal court in Brooklyn, New York.

ICOs are a fundraising mechanism used by blockchain startups that are similar to initial public offerings in equity markets; in an ICO money, money is raised before a product is ready for market.

Zaslavskiy said he and his accomplices lied to investors when he claimed his REcoin virtual currency was backed by real estate investments in developed economies, and that more than 2.8 million REcoin tokens had already been sold.

"We had not yet purchased any real estate," Zaslavskiy said.

In August 2017, he started a second cryptocurrency venture called Diamond Reserve Coin, which he claimed was backed by diamonds. “We had not purchased any diamonds,” he said.

Zaslavskiy faces as long as 37 months in prison when he’s is sentenced April 19 for conspiracy to commit securities fraud. Prosecutors didn’t say how much investors lost.

"This is a case where he had a good-faith belief in his cryptocurrency products, but he marketed it as further along than what had been actually developed,” his lawyer, Mildred Whalen, said after court.

U.S. District Judge Raymond Dearie in September ruled that federal securities fraud laws may be applied to cryptocurrencies. The indictment "charges a straightforward scam," he said, saying it would be up to a jury to decide whether the initial coin offerings at issue were securities.

The case is U.S. v. Zaslavskiy, 17-cr-647, U.S. District Court, Eastern District of New York (Brooklyn).

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