A federal judge in Brooklyn has dismissed a challenge to federal prosecutors' use of securities laws to go after alleged fraud in the cryptocurrency market Tuesday, bolstering the government's use of the Depression-era laws to go after 21st century digital currency violations.

Maksim Zaslavskiy was arrested in November 2017 after the U.S. Attorney's Office for the Eastern District of New York charged him with violating securities laws in connection with two virtual currency investment schemes. Zaslavskiy allegedly lied about the underlying assets when he issued initial coin offerings for two investment ventures, one related to real estate and the other diamonds, according to federal prosecutors.

Prosecutors and regulators—the U.S. Securities and Exchange Commission brought civil charges based on the same underlying allegations—say the problem is that the underlying physical things of value—the diamonds and the real estate properties—were nonexistent. In the real estate scheme, prosecutors allege no brokers were hired, and no real estate was purchased, despite getting approximately 1,000 investors to buy tokens. Similarly, the diamond investment didn't include the purchase of actual diamonds, officials claim, despite Zaslavskiy telling potential investors otherwise.

In February, Zaslavskiy's attorneys moved to dismiss the indictment against him. They argued cryptocurrencies are exempt from securities regulations as currencies, and that they don't represent investment contracts—and, thus, securities—within the meaning of the law.

The motion went on to describe how the “innovative technology” with “potentially transformative implications” is threatened by the government's use of securities laws “written in the 1930's” in attempting to regulate them.

“While the flexibility of securities laws generally provides enough meaningful notice for criminal enforcement of other asset classes, they fail to do so in the unique case of cryptocurrencies,” Zaslavskiy's attorneys argued.

U.S. District Judge Raymond Dearie, in dismissing Zaslavskiy motion to dismiss the charges, said that the label the defendant tried to attach to the scheme didn't control the analysis of the indictment's sufficiency, “[n]or does it camouflage the core nature of his alleged criminal endeavors.”

“Stripped of the 21st-century jargon, including the Defendant's own characterization of the offered investment opportunities, the challenged Indictment charges a straightforward scam, replete with common characteristics of many financial frauds,” the judge wrote.

The factual questions about whether Zaslavskiy offered a security or something else is best left to the finder of fact, Dearie said, adding that while the parties' debate was “spirited,” it was ultimately premature.

“Despite the parties' attempt to cast this issue as one related to the Indictment's facial sufficiency, they have instead asked us to resolve what can only be a question of proof at trial, based on all the evidence presented to a jury,” he said.

Dearie went on to find the indictment sufficiently alleged elements of an investment scheme offered by Zaslavskiy, and that the federal statutes he allegedly violated are not unconstitutionally vague as applied to cryptocurrencies.

Federal public defense attorney Mildred Whalen represents Zaslavskiy. She told the New York Law Journal she and her client are disappointed in the judge's decision, but will continue to fight the case.

A spokesman for the U.S. attorney's office in Brooklyn declined to comment.

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