A US Federal Jury Says Crypto 'Paycoin' is Not a Security

A US Federal Jury Says Crypto 'Paycoin' is Not a Security

Adding to the ongoing debate on the legal status of cryptoassets, a federal jury in Connecticut, USA, has ruled that a cryptocurrency and related assets offered by Paycoin founders are not securities. 

The jury issued its verdict - which goes against the stance presented by the Securities Exchange Commission (SEC) - in relation to a case involving Homero Joshua Garza, the founder of the Paycoin cryptocurrency, according to comment by law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, published in The National Law Review. 

The US Department of Justice (DoJ) had previously successfully prosecuted Garza who plead guilty in 2017, received a 21-month prison sentence and was ordered to pay about USD 9.2m in restitution. 

The latest trial involved a civil securities class action brought against Stuart Fraser, Garza’s business partner and mentor, and two crypto mining entities founded by Garza, GAW Miners and ZenMiner. The complaint stated that the defendants developed a scheme with the aim to defraud investors by offering them a variety of products, including interests in their crypto mining operations and, eventually, Paycoin.

As part of the trial, the judge instructed the jury to decide whether the offered products constituted investment contracts, and, consequently, securities. To answer this question, jurors had to apply the so-called Howey Test developed by the US Supreme Court in 1946. 

According to this test, and per an analysis by the Congressional Research Service, a product must comply with the following criteria to be deemed a security: 

  • it must be an investment of money;
  • it must be in a common enterprise;
  • it must entail a reasonable expectation of profit;
  • and these profits must be derived from the efforts of others.

After deliberations, the jury concluded that none of the products sold to investors, including Paycoin and crypto-mining related investment products, were investment contracts or securities. 

Jurors also rejected the fraud claim, providing Fraser with a complete defense win.

"While the jury’s verdict might provide an interesting glimpse into public sentiment and understanding of cryptocurrency, it is far from the last word on how cryptocurrencies will be defined as an asset class, if at all. The verdict also stands in stark contrast to the intensifying wave of state and federal regulatory activity concerning cryptocurrencies," the law firm concluded.