We just can’t seem to get away from phony initial coin offerings (ICOs). A former businessman turned cryptocurrency enthusiast in Brooklyn is facing up to five years in prison for organizing two fake ICOs in 2017.
ICOs, though still relatively new, remain a popular way for new businesses and startups to garner capital for their operations. Through an ICO, business ventures can garner funds – usually via ether tokens – from investors who in return, are granted special access to an entirely new coin developed by the business in question. Investors can then utilize this coin to gain access to the company’s products and services. It’s a straightforward give some, take some partnership between the funder and the funded.
But sometimes, greed and avarice take over one’s initial business dealings, and over the past year, many of these ICOs and similar funding methods have turned out to be fake. 2018 has proven to be a huge year for phony ICOs. Thus far, over $500 million has been lost to ICOs that up and disappear once they start. Investors are usually left with lighter pockets, damaged pride, and a handful of enterprise-based tokens they can no longer use.
So, What Happened This Time?
In this case, the fraudster goes by the name of Maksim Zaslavskiy, a former institutional developer and self-appointed “businessman.” Zaslavskiy pled guilty to two counts of conspiracy to commit securities fraud in front of a New York judge on Thursday, November 15, 2018. He also confessed to defrauding about 1,000 separate investors with a cryptocurrency called RECoin, the first digital asset to allegedly be backed by real estate listings.
In addition, Zaslavskiy claims to have sold special “diamond” tokens that were purportedly backed by real, physical diamonds. Both claims – along with the tokens being advertised – were fake, as there are no blockchains powering them.
U.S. district attorney Richard Donague explained in an interview:
“The calculated lies of Zaslavskiy and others led to unsuspecting investors who thought they were purchasing cryptocurrency securities to buy worthless certificates.”
Court documents claim that Zaslavskiy told his investors RECoin had a “team of lawyers, professionals, brokers and accountants” behind it, and that roughly 2.8 million separate tokens had been individually sold up to that point. In truth, RECoin had only attracted about 1,000 investors.
Crypto Crime Never Goes Unpunished
FBI assistant director-in-charge William Sweeney explained that Zaslavskiy and his associates “dressed old-fashioned criminal schemes in the language of new currency” to garner funds they didn’t earn and had no rights to from unsuspecting (and new) investors.
The judge overseeing the case issued a warning to the crypto industry, saying that simply labeling something a digital asset does not make it money, and that using the term “cryptocurrency” will not give phony initiatives any special leeway. He commented that the Securities and Exchange Commission (SEC) is cracking down on all fraudulent cryptocurrency projects, and those looking to defraud their investors should expect heavy consequences.
Aside from a potential five-year prison sentence, Zaslavskiy is also facing civil charges from the SEC. These charges will be settled once the court decides on a proper sentence.
This Happens a Lot, Doesn’t It?
A similar story occurred recently on the opposite side of the country when on November 9, 2018, Joseph Kim in Arizona was fined approximately $1.1 million and given a 15-month prison sentence for allegedly running phony bitcoin and Litecoin schemes against several investors including, his former employer.
Court documents report that Kim had misappropriated his employer’s funds between the months of September and November of 2017. During this time, Kim was working at a Chicago-based trading firm. He secretly transferred the company’s tokens from the exchange into his own wallet, then left his position with the company to go out and solicit investors.