SEC v. Telegram — the battle for US crypto

Amongst the many court battles ongoing in the crypto space, one holding particular significance in its outcome’s effect on the industry at large is that of the U.S. Securities and Exchange Commission (“SEC”) against popular messaging app Telegram Group Inc. (“Telegram”). Indeed, it has been called the most followed 2019 legal drama in the crypto space on numerous occasions.

With the outcome expected with the Judge’s ruling today, here is a short recap on the case:

In February 2018, Telegram officially entered into the digital asset industry with its raising of an astounding $1.7 billion when the company conducted an Initial Coin Offering (ICO) to acquire funds for the development of its blockchain dubbed the Telegram Open Network (TON) and the TON’s native digital currency — the Gram. Telegram was set to launch the project in October 2019, releasing 2.9 billion Grams to its investors. However, shortly before the official launch date, the SEC filed an enforcement action against the company, accusing it of having violated the Securities Act of 1933 when it conducted an unlawful offer and sale of digital assets, which it treats as securities, without following and acquiring the proper registrations.

Up until now, the United States have often been accused of lacking regulatory clarity for cryptocurrency-related businesses who wish to be compliant. Indeed, a common debate in the country is as to how digital assets should be legally treated. So far different authoritative agencies have clashed on the matter as they claim crypto under their jurisdictions, which highlights the true significance of the fight between Telegram and the SEC. As we await Judge Castel’s decision today, onlookers are eager wondering — will a precedent be set for digital assets to be recognised as securities? Or will Telegram’s defense hold in their affirmation that the Gram is a commodity, and thus falls under the purview of the Commodities and Futures Trading Commission (CFTC) in the United States?

In this context, the world witnessed a fierce battle over access to the company’s bank records this past January, as the SEC attempts to determine what the raised funds were used for. While at first access was denied to the regulatory authority, with Telegram lawyers describing the attempt as an “unfounded fishing expedition” in a letter to the Judge, the ruling was subsequently reversed with the company now compelled to issue the relevant records, albeit most likely in a heavily redacted form. With Telegram promptly agreeing to do so, today’s court proceedings allow for both parties to bring forth uncovered evidence.

At this stage, Telegram, who has consistently stressed that Grams are not an investment, has put on hold the release of its Grams until the resolution of the case. Industry players now await news of the outcome, wondering whether the Judge’s ruling will set the stage for a more hostile treatment of crypto businesses in the country or whether U.S. regulators will acquiesce in recognition of crypto’s innovation and development.

[This piece is extracted from my work writing the Enigma Securities’ January 2020 Industry News Report. Modified 19. Feb 2020]