Telegram underestimated US regulators and the definitional ambiguity of US securities lawOther noteworthy developmentsConclusion
Thursday, 11 June, 2020
The Digital Regulator
Telegram, or the strategic importance of regulators
In May 2020, Telegram endedendedlink1 its cryptocurrency project, the Telegram Open Network (TON), and gave upgave uplink1 fighting the U.S. Securities and Exchange Commission (SEC), which had halted the project last year. One month before, Facebook had re-issuedre-issuedlink1 its cryptocurrency project Libra under revised terms, following an implicit global regulatory halthaltlink1 last year. Several less prominent projects suffered a similar fate over the last three years (due to either enforcement or fear of it).
Promoters of cryptofinance and blockchain projects must consider upfront regulators as a key strategic element, not as a mere compliance variable. Traditional finance has learned this the hard way over the last 15 years.
Telegram underestimated US regulators and the definitional ambiguity of US securities law
Telegram’s initial coin offering (ICO) took place in early 2018. It raised USD 1.7 bn from purchasers globally (including from the US) and promised the delivery of Gram coins (and related blockchain products) by the end of October 2019 under the contractual terms ‘Simple Agreement for Future Tokens’ (SAFT). However, the SEC halted the ICO the same month, arguing that Telegram had violated the Securities Act of 1933. The legal dispute that followed was settled in a US court on 24 March 2020, following which Telegram abandoned the project and withdrew its appeal over the decision.
The story is only complete, however, if we recall that on 11 December 2017, the SEC1 urged ICO promoters and their advisers ‘to engage with the SEC staff to aid in their analysis under the securities laws’ before ‘promoting or touting the offer and sale of coins’.
The Telegram ICO took place in a period that saw considerable regulatory developments in the crypto and blockchain spaces. The ICO financing method itself became popular during the second half of 2017 and was swiftly followed by global regulatory pronouncements warning investors about the risks involved, as well as by intensive work by regulators to assess and decide the terms and conditions of such financing processes and coin introductions.
The SEC was particularly active during the fourth quarter of 2017. It summarised in an official statement on 11 December 2017 the various pronouncements it had made in the preceding months, stating that ‘the structures of initial coin offerings …involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws’. It cautioned market participants ‘against promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions’. It also encouraged ‘market participants and their advisers to engage with the SEC2 staff to aid in their analysis under the securities laws' before promoting an ICO to US purchasers.
In conclusion, it is of paramount importance, for the success and viability of digital projects, to consider regulators as a major strategic variable in projects—before launch as well as during implementation. History shows that those who choose a different approach are likely to incur delays and additional costs (such as Facebook’s Libra), and, in the worst case, outright withdrawal of the project (such as Telegram’s TON Blockchain) or regulatory enforcement action.
Other noteworthy developments
Several new jurisdictions have become crypto-friendly. Globally, several steps have been taken towards crypto and blockchain adoption.
China released the e-Yuan
In a new digital endeavour, the business design, implementation, and technical aspects are the most exciting parts, which are often ranked over all other features by passionate promoters. Yet, the still-young history of cryptofinance shows that many good businesses and technical plausible business cases fail for regulatory reasons. Telegram is a prominent example. The delays encountered by Facebook’s Libra are another illustration. Regulatory enforcement or fear of it have claimed several victims in many jurisdictions. The important point to be learned is that regulation is a variable determining the success of a digital project as much as business and technical considerations.
The period under review provided evidence of continuing crypto adoption, with new favourable regulations adopted in several jurisdictions.
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