BitOoda Global & Regulatory Analysis, 10/14/2019: Scenarios and Forecasts from the Telegram Case
What a week on the regulatory front! The CFTC Chair classified ether as a commodity and said he expects ether futures to appear on the market in the near future; the SEC rejected Bitwise’s bitcoin ETF proposal; the leaders of the SEC, CFTC, and FinCEN issued a joint statement reinforcing Bank Secrecy Act and AML/CFT requirements for digital assets; and the SEC filed an emergency action against Telegram halting the company from selling or distributing its tokens in the U.S.
Of these four momentous developments, the Telegram case is the one we feel has the most relevant and direct implications for BitOoda and our clients in the near term. It follows just days after the Block.one settlement, which last week we assessed to be a significant validation of the SAFT model and the concept that tokens can change classification based on their usage. One important difference in the Telegram case is that the SEC took action before the distribution of the Gram tokens and the launch of the TON blockchain, leaving the future of that enterprise (and the company) as an open question. Also, unlike Block.one, Telegram and the SEC seem to be at odds over their communication on the case, with the SEC stating Telegram refused to respond to an administrative subpoena and the company claiming it is “surprised” by the lawsuit after trying to solicit feedback from SEC for the last 18 months.
We see several ways this case may play out, depending on a large number of factors including SEC’s strategy/approach, Telegram’s response, and details such as the terms of the initial SAFT.
· The SEC may demand in relief and civil penalties the full $1.7 billion that the company raised in the sale of its 2.9 billion tokens.
· The SEC may settle for a lesser penalty, similar to the Block.one settlement.
· Regardless of the size and nature of the penalty, the SEC may or may not permit the token distribution and network launch to proceed (at least in the U.S.), which would have significant implications to those who already started trading the tokens on the secondary market.
· In addition, investors could demand that Telegram return their contributions when its network does not launch on October 31 (the company has informed investors it plans to delay the launch), depending on the terms of the initial SAFT.
Based on the public criticism about SEC’s handling of the settlement with Block.one (0.6% of the funds it raised), we see it much more likely that the SEC will take a harder line toward Telegram. Multiple news outlets are focusing on a quote from the Co-Director of SEC’s Enforcement Division, who said “we have repeatedly stated that issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token” — a tone that indicates to us that the SEC could look to use this case as an example. Earlier this summer, we forecasted that “we should expect an accelerated pace of regulatory activity by U.S. federal agencies over the next six months” — the proliferation of significant enforcement actions like this could signal the SEC’s growing impatience with actions it sees as directly flouting federal securities laws.
We don’t have enough space in this weekly writeup to dive into other interesting questions stemming from the Telegram lawsuit — such as (1) how Coinbase, which leads the new Crypto Ratings Council tasked with guiding industry on the appropriate classification of tokens, let its Custody arm announce support for the GRM tokens, (2) the degree to which Telegram’s lack of transparency and communication contributed to the SEC’s decision to take action, or (3) how this case relates to the lawsuit against Ripple by investors claiming XRP is an unregistered security — but please contact us if you’d like to dive deeper, as these are issues we would love to discuss with you.
The bottom line for BitOoda and our clients, which you have heard from us before, is the critical importance of working with knowledgeable and licensed firms to trade properly-vetted assets in a compliant manner to avoid the types of legal and regulatory issues that continue to trouble the industry. With our regulatory status as an NFA IB and FINRA BD, our diligence in evaluating any tokens with which we transact on our clients’ behalf, and our network across the entire digital asset space, we are uniquely positioned to guide and execute compliantly and effectively for our clients.