A major court case between the Securities & Exchange Commission and the well-known startup Telegram is shaping up to be a defining case over cryptocurrency. The company is Telegram which has been charged with violating investor protection laws. The S.E.C. says that Telegram’s digital coins are actually a security and not a currency. The case is in the federal court in Manhattan. Both sides have filed extensive legal briefs asking a federal judge to rule, even in advance of discovery in the case. Telegram’s Messenger is an encrypted messaging app with over 200 million active users including Hong Kong protesters and others.
The S.E.C. says the company should have provided investors with financial disclosures that they get when they buy stocks. It has asked the judge for a preliminary injunction preventing Telegram from distributing the cryptocurrency to investors. Telegram’s cryptocurrency sale is set forth in two phases the receipt of investor funds from the distribution of a digital asset This gives the startup time to develop a product so it can claim the cryptocurrency has a consumer use and isn’t an investment. Telegram argues the design avoids SEC oversight because investors didn’t actually receive the digital asset, known as Grams, at the time they sent money to Telegram. By the time they receive Grams—if the SEC’s lawsuit doesn’t prevent that—the coin would be a commodity, obviating SEC oversight, Telegram says. The EE.C shows evidence showing that investors pay money to receive the coins intending to trade them for profit, making them more like investments.
In September, Telegram contacted Circle Internet Financial Ltd, which owns a cryptocurrency exchange Ploniex asking it to make coins available for public trading saying that it wasn’t a security and was therefore eligible for the largely unregulated platform say the court records. This is a case that cryptocurrency companies and investors are watching closely. Stay tuned.
Jeffrey Newman represents whistleblowers worldwide including those whistleblowers in cases involving cryptocurrency and cryptosecurity issues. His email is Jeff @JeffNewmanLaw.com 617-823-3217.