Commissioner Hester M. Peirce of the Securities and Exchange Commission (SEC) delivered a June 21 speech at Blockchain Week in Singapore where she expressed her dissent regarding the recent settlement between the SEC and Telegram.

It is unsurprising to hear Commissioner Peirce disagree with the recent court ruling barring the release of Telegram tokens to all investors, and subsequent settlement with the SEC.  Commissioner Peirce has made it clear that she did not agree with the originating October 2019 emergency order filed by the SEC against Telegram.

Timeline of Telegram Raise and Court Case

Synopsis of Telegram Raise

• $1.7Bn raised from investors ($424.5M from American investors)
• 171 investors (39 Americans)
• Accredited investors only
• A minimum investment of $1M per person or entity
• The invested money was to be used to develop the Telegram Open Network (TON) blockchain and grow and maintain Telegram Messenger.

What Issues Does Commissioner Peirce Raise?

The court sees “one single scheme”. Commissioner Peirce takes issue with the court treating the investment agreement between Telegram and the accredited investors, the delivery of the tokens to the investor, and the resale of the tokens, as one single scheme.  She laments, “gone is the distinction between the investment contract (the agreement between Telegram and the accredited investors) and the token (the asset to be created and delivered under the agreement)”.  Commissioner Peirce believes that the initial investments in the company are to raise capital to build the platform, and that those initial investments are separate from the resale of a functional token “… such tokens, once they have a consumptive use, should be able to be sold to purchasers outside of a securities transaction”.  She believes the Howey test supports the idea that the resale of the tokens does not constitute as a security simply because the tokens were initially acquired as a part of a securities transaction.

What is a requirement for success, is deemed an illegal securities offering by the SEC. What the SEC sees as an illegal securities offering (widespread global distribution of the token), Commissioner Peirce sees as a necessary element for a successful blockchain.  “I do not support the message that distributing tokens inherently involves a securities transaction…. I see [widespread distribution of tokens] as a necessary prerequisite for any successful blockchain network.”

The SEC is overreaching. Commissioner Peirce also takes issue with the fact that the SEC, asked and was granted, enforcement against a corporation that is not incorporated or based in the US, and only a quarter of the investors and total investment were US-based.  She reminds us that the American way is not the only way in a global economy “This willingness of the SEC to ask for, and of the district court to grant, such sweeping injunctive relief against a non-US company, in a case where one-quarter of the funds came from US investors, reasonably might raise some concerns among our international colleagues…  we would do well to recall that our way is not the only way.  We should be cautious about asking for remedies that effectively impose our rules beyond our borders.”

At Your Own Risk – No Clear Path

Interestingly, Commissioner Peirce notes that Telegram employed sophisticated counsel, “made good faith efforts to comply with federal securities laws” and “engaged extensively with SEC staff”.  It begs the question – what went wrong?  Did the SEC give improper guidance?  Did Telegram choose not to follow the SEC’s guidance?  Did the SEC change its mind once Telegram was due to distribute tokens to investors?  These questions do not have clear answers and continue to leave companies in risky and unknown waters when conducting token offerings in the United States and/or with American investors.

It is clear that Commissioner Peirce believes that the SEC is not doing enough to help guide companies in the right direction, she notes “rather than provide useful guidance on safety standards and functional braking technology… [leaving] the industry to guess at the path to compliance”.  Companies should not have to assume the risk of guessing at the correct path to compliance.

Who Did the SEC Protect? 

The case of SEC v Telegram Group Inc. and Ton Issuer Inc. was petitioned by three investors; seven investors are listed as interested parties.  All the investors would have had to qualify as “accredited investors” under the federal definition to invest in the Telegram raise.  The minimum threshold for investing in Telegram was USD$1,000,000.

At the end of her speech, Commissioner Peirce asks, “who did we protect by bringing this action?”.  It is a good question – one would assume that an investor with the capital to invest $1M in the Telegram raise is a reasonably sophisticated person or entity that understands the inherent risks of investing in new technology and early stage start-ups.  So, who did the SEC really protect in this case?  It appears that the only people protected were a handful of sophisticated investors who were unhappy with the risk they knowingly took.

Moving Forward

Since 2018 the crypto industry has witnessed a growing trend of companies refusing to accept American investors.  It is likely that this trend of barring American investors will continue until there is clear guidance from the SEC.  Due to the SEC’s enforcement actions and lack of guidance, most companies simply deem it too risky to allow American citizens, residents, or entities to invest in capital (token) raises.

In February of this year, Commissioner Peirce announced her proposal to bridge the gap between regulation and decentralization.  She calls this proposal a safe harbor that gives companies a three-year grace period to develop a functional network.  At the end of the three years, the tokens would not be deemed securities providing there is a functioning network where the token can actively be used for goods and services.  Additional details about Commissioner Peirce’s safe harbor proposal can be found in the link above.

While Commissioner Peirce’s safe harbor proposal is well thought out and appears to be a great way to move forward, unfortunately, it is still simply a proposal.  Given the ongoing refusal of the SEC to provide clear written guidance, rules, or regulation, we do not expect that Commissioner Peirce’s safe harbor will be adopted any time soon by the SEC.  We expect to see other global markets take the lead in decentralized projects if clear guidance or regulations are not set out by the SEC.

Real-World Asset Tokenization Done in Switzerland

Asset tokenization, is the space where traditional assets and digital tokens intercept to allow issuers to build completely new financial products and investors to participate in new ways.

Even if there’s still some way to go, there has been a lot of progress made in the digital asset space to enable tokenization of real-world assets. Testament to this is also the recent announcement from SEBA, a Swiss regulated banking entity.

Founded with a mission to bring closer traditional finance and digital assets, the digital bank has now signalled that it’s entering the asset tokenization space. In this regard SEBA aims to develop innovative solutions where their clients can issue and manage financial assets on multiple blockchain protocols and make these easily accessible to investors.

The digital bank is no stranger to digital assets, as it already offers a suite of services around these, from digital custody to trading, transaction banking as well as crypto-collateralized lending.

SEBA as a regulated entity, follows a fully compliant path in order to target large institutions. The Swiss financial institution wants to work with banks, professional investors, family offices, asset managers and other blockchain companies.

As such, the bank’s entrance in the space is accompanied by a partnership with Digital Asset Shared Ledger (DASL) which is built on the enterprise blockchain Corda.

SEBA Partnering with Liquidity Network DASL

The bank will leverage the Digital Asset Shared Ledger (DASL) to expand its services which is a liquidity network for digital assets. DASL facilitates the transfer of digital assets across the public Corda network which is a peer-to-peer network of DLT nodes, enabling interoperability across multiple systems, apps, and processes.

As a result, this partnership will allow SEBA to provide institutional clients the ability to issue and invest in digital securities representing financial instruments on the Corda network.

DASL’s securities offering includes several capabilities including issuance, portfolio management, asset servicing, clearing and settlement – all powered by distributed ledger technology (DLT). Furthermore DASL’s network capabilities are fully compliant with securities regulations.

The bank already has several services for their clients that relate to digital assets, and asset tokenization will be offered as a complement to SEBA’s Custody, Asset Management and Trading product.

As part of the asset tokenization offering, according to SEBA’s description, clients will be able to tokenize fiat and precious metals, alternative assets like real estate and commodities as well as explore tokenized ecosystems of companies with products (as utility tokens) and conduct security token offerings.

SEBA will create a wallet for onboarded custody customers, issue digital securities and distribute them to wealth management and other investor networks. In partnering with DASL, SEBA relies on the team’s experience building critical infrastructure for financial institutions.

A Partnership for Further Development

While still at an inception phase, the partnership may bring further product generation and liquidity creation over time, where DASL will support SEBA Bank’s strategy to be a partner to institutions.

Matthew Alexander, Head Tokenization at SEBA Bank, explains how important it is to build a trusted platform for the adoption of digital asset securitization:

“Widespread adoption of Digital Assets and securities by institutions requires trusted venues for distribution and for secondary trading and liquidity. DASL provides SEBA with an immediate and secure platform for our Digital Securities product range. We look forward to combining our strengths with those of DASL to further enhance our client solutions and services.”

“We are delighted to partner with SEBA Bank and bring them onto the public Corda Network with DASL.DASL provides an accelerator to the digital capital markets for SEBA’s institutional clients.” stated Richard Crook, Founder DASL.

Over the last two years, SEBA has made notable strides in the digital asset space. The Swiss crypto bank managed to significantly expand its products and services to the institutional market. Earlier this year, SEBA also raised $100 million in funding six months after receiving the banking license in August 2019.

Opening up the door for asset tokenization to institutions is one of the key aspects to widespread adoption of digital assets on a large scale. Once institutions that follow rigorous compliance measures can issue, manage, and trade digital asset securities, it could open the floodgates for interest from a wide variety of investors on a global scale. This could be a critical point that kickstarts the transition from traditional asset securitization to all-digital.

In a joint effort by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), cryptocurrency trading app Abra, and its partner, Plutus Technologies, have been fined $300,000.  The total represents two $150,000 fines, with each being paid to the CFTC and SEC.

The fines were imposed by the two regulatory bodies for “offering and selling security-based swaps to retail investors without registration and for failing to transact those swaps on a registered national exchange”.  For more information you can review the CFTC order and the SEC order.

A Brief Timeline

While there are instances where companies are blatantly in breach of regulations, the situation involving Abra and Plutus is not as simple.

The issue originally arose over a year ago, when Abra had their first run-in with the SEC.  At the time, Abra offered its clients ‘synthetic exposure’ to U.S. based securities.  This was achieved through Abra providing its clients access to investments, in the form of a contract which mimicked the securities, without actually purchasing the underlying asset.

As a result of offering this service, multiple events took place.

• SEC identifies Abra security-swapping service as being in violation of regulations
• Abra shuts down security-swapping, after found servicing U.S. based investors
• Abra moves various operations to the Philippines
• Security-swapping services re-launch, with access revoked to U.S. based investors.

Unfortunately for Abra and Plutus, regulators felt that ceasing service for U.S. investors, and moving a portion of their operations to the Philippines, was not enough.  It was found that much of the design and operational aspects of the service, continued to occur within the U.S., making it subject to U.S. regulations.

Representatives from the CFTC and SEC, commented on this.  They touched on how, despite investor restrictions, the rules still apply.

Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, stated,

“Businesses cannot ignore the registration requirements designed to provide investors with the information necessary to evaluate securities transactions…Further, businesses that structure and effect security-based swaps may not evade the federal securities laws merely by transacting primarily with non-U.S. retail investors and setting up a foreign entity to act as a counterparty, while conducting crucial parts of their business in the United States.” 

The Charges

While both the CFTC and the SEC, were involved in the issuance of these fines, their rulings were independent.  In each case, Abra and Plutus were able to pay the fine, with no admittance to any wrongdoing.  The following were the findings of the regulatory bodies.

CFTC – Abra/Plutus in violation by, “…entering into illegal off-exchange swaps in digital assets and foreign currency with U.S. and overseas customers and registration violations.”

SEC – Abra/Plutus in violation of, “…federal securities law provisions concerning unregistered offers and sales of security-based swaps and requiring that certain swap transactions occur on a registered national exchange.”

Money to Spare

Roughly two months ago, we reported on a $5M investment into Abra, by the Stellar Development Foundation (SDF).  This move caught our attention at the time, because it marked the potential for Abra to eventually foray into the world of stablecoins and digital securities. The SDF has shown an interest in these types of investments, as evident through a similar past investment in security token platform, DSTOQ.

With this fine, it would appear as though Abra was dealing in securities all along – even if they didn’t realize.

Despite having to pay the fines discussed here today, Abra appears unlikely to be phased.  Between the aforementioned investment from the SDF, and others, Abra has raised north of $45M since its creation.

Abra

Founded in 2015, Abra is a crypto-currency investment app, based out of Mountain View, California.  Since its launch, Abra has gone on to become a popular platform for investors.  It provides access and trading support for a bevy of digital assets.

CEO & Founder, Bill Barhydt, currently oversees company operations.