According to multiple sources, the number of major Telegram ICO investors ready to accept refunds has skyrocketed. Originally, investors wanted a 100% refund of their funds. Unfortunately, the Covid-19 epidemic has caused many to switch their stance over to settle at a fraction of the funds paid into the token.
One report listed 10 major investors in Telegram’s blockchain project as ready to take what they can get immediately. Importantly, the Telegram ICO raised $1.7 billion from a variety of international investors. Up until this week, investors seemed ready to battle for a full refund. Now, given the state of uncertainty all the markets face, investors revealed they are ok with a 72% refund. Notably, Telegram stated that 5- 7%% of the funds were already spent on the development process in the intervening months.
Not Enough to Appease Investors in a Bull Market
Notably, back in October 2019, the firm offered 77% of invested funds back as refunds for the project. At the time, investors chose to reject the offer and agreed to extend the deadline for issuing the tokens to April 2020. The market was strong and most investors revealed a desire to receive tokens over refunds. However, these tokens never issued.
Telegrams Difficulties Continue
Telegram’s problems arose from their record-breaking ICO. The crowdfunding campaign came under investigation by the U.S. Securities and Exchange Commission last year. Regulators claim that Telegram violated securities laws when it illegally sold securities. In addition to the legal issues, the platform promised to deliver GRAM token to initial buyers before November of 2019. Unfortunately, the SEC blocked the company from completing this task just two weeks before the scheduled launch.
SEC Files Injunction – Telegram
At that time, the SEC filed an emergency action to halt the launch of the TON blockchain and GRAM token. Shortly following this decision, regulators obtained a restraining order against the company. On top of the SEC infractions, a federal court in New York ruled against Telegram this week. The court found that issuing the Gram tokens would constitute a violation of securities laws. Specifically, a judge of the Southern District of New York instituted a preliminary injunction. This injunction claimed that Telegram failed to register its ICO. Consequently, the firm violated the registration provisions of the Securities Act of 1933.
Market Speaks on the Changes
Speaking on the new developments, Head of Russian digital currency investment firm Hash CIB, Yakov Barinsky explained how the attitude of most investors changed recently. He stated that investors accepted the new refund conditions after the market collapsed. Currently, the entire global economy is in a state of stagnation.
Telegram Faces Uphill Fight
The hugely-popular messaging app became a global leader in the sector through a combination of an easy-to-use interface and advanced features. Of these features, Telegram’s use of end-to-end encryption is best known. In the past, this feature received heavy government scrutiny as it prevented their surveillance efforts.
Today, Telegram finds itself in the middle of a hard-fought court battle and a global epidemic that halted economic activity across the board. Unfortunately for the TON blockchain project, this perfect storm could prove as a death blow to the firm’s blockchain aspirations. For now, Telegram seeks clarification on the rulings.
Supreme Court Reins in SEC on Disgorgement
While the SEC holds a huge amount of influence and power, they do not operate without oversight, themselves. This was on full display on Monday, as the U.S. Supreme Court issued a new ruling on SEC authority surrounding disgorgement.
Essentially, it was ruled that, while the SEC will retain the ability to seek disgorgement from offending parties, it will be limited to their profits. This means that if a company raises $50M through illegal means, the SEC can only seek to retrieve funds up to the $50M minus any genuine operating costs.
The purpose for this limit is a simple one – disgorgement is permitted as a remedial, rather than punitive, action. If the SEC were to seek funds exceeding what was raised, it would no longer represent a retrieval of funds, but a punishment for their actions.
Furthermore, the ruling indicates that funds, retrieved through these means, are to be used as compensation for victims that have lost money.
For those unfamiliar with disgorgement, it refers to the repayment of funds received/generated by parties which violated existing laws.
In recent years, disgorgement has been a commonly used method of the SEC, as made evident in various cases stemming from the 2017 ICO boom.
For those interested, the entirety of the U.S. Supreme Court’s ruling can be found HERE. While there are various intricacies involved, the court’s decision can be broadly summarized by their statement, as follows.
“The Court holds today that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under §78u(d)(5).”
As aforementioned, the SEC has turned to disgorgement on various occasions, as of late. The following articles are a few examples of it being used in crypto based cases.
Based in the United States, the SEC is a government run regulatory body. This outfit is tasked with fostering safe, and transparent, markets surrounding securities. This entails both the creation, and enforcement, of laws surrounding the sector.
SEC Chairman, Jay Clayton, currently oversees operations.
In Other News
While Jay Clayton may still be in charge at the SEC, his time at the helm may soon be coming to a close. We recently touched on a tricky situation, currently evolving, which would see Clayton depart the SEC for a position as an Attorney General in Southern New York.
SEC Chairman Jay Clayton Moving On?
Caught in the Middle
Jay Clayton, Chairman of the SEC, has found himself caught in the middle of a tricky situation. The story goes like this:
On June 19th, U.S. Attorney General, William Barr, announced the Trump administration’s intent to name Jay Clayton the new U.S. Attorney for Southern New York.
This announcement soon became a major point of contention, as Geoffrey Berman (the current U.S. Attorney for Southern New York) had refused to abandon his post. This stance was changed, however, when assured that his departure would not derail current investigations.
Replacing Geoffrey Berman for the interim is Deputy U.S. Attorney, Audrey Strauss.
While pure speculation at this point, many believe that these actions were taken due to ‘burnt bridges’ between Berman and the Trump Administration. More specifically, Berman was/is at the helm of various corruption inquiries into associates of the POTUS.
The situation has seen various senators weigh-in on the situation. Notably, Senator Chuck Schumer believes an immediate investigation should be launched into the situation. Furthermore, he had strong words for Clayton, himself, stating,
“Jay Clayton can allow himself to be used in the brazen Trump-Barr scheme to interfere in investigations by the U.S. Attorney for SDNY, or he can stand up to this corruption, withdraw his name from consideration, and save his own reputation from overnight ruin.”
Back to Roots
If this move were to happen, it would not necessarily mark a return to his roots. Prior to his tenure at the SEC, Jay Clayton was a seasoned corporate lawyer, with decades of experience. What he lacks, however, is experience as a prosecutor – typically a prerequisite for Attorneys Generals.
While his duties stretched far beyond regulating the burgeoning blockchain sector, Clayton developed a complex relationship with the community through his time at the SEC, thus far.
Clayton has many detractors from the crypto community, as he has had a hand in the denial of many Bitcoin ETF applications.
At the end of the day, however, the world of crypto remains rife with scams,y. Despite having massive potential, Clayton has, for the most part, made sound decisions in regulating the growth of crypto base endeavours.
Be Careful what you Wish For
While Clayton may not be pro-crypto, there are many examples throughout his tenure of openness towards these young markets.
Those excited to see his potential exit should be wary, as his successor may very well adopt a strong anti-crypto sentiment – something which could prove to be very harmful for a sector still in its infancy.
A Short Run
If opting to leave his post at the SEC, Clayton will have completed a roughly 3 year stint at its head. So far, no word has been given on a possible successor as the Chairman of SEC.
For decades, the position of Chairman at the SEC has been a revolving door. The last individual to serve longer than 4 years was Arthur Levitt, during the Clinton Administration.
Word of Clayton’s potential replacement comes 1 year after the CFTC saw their very own chairman, J. Christopher Giancarlo, step down. During their time spent at the helm of their respective organizations, both, Clayton and Giancarlo, were vocal on their approach towards blockchain. While Clayton has remained more conservative, to this date, Giancarlo was viewed as more progressive and welcoming to change.
OSC Finds Extensive Evidence of Fraud/Theft by Gerald Cotten and QuadrigaCX
Over a year has passed since the demise of popular Canadian exchange, QuadrigaCX. Despite this length of time, new findings are still being released surrounding the peculiar chain of events that saw $215 million go missing – a total representing the holdings of over 75,000 clients.
While the actions of Gerald Cotten and QuadrigaCX are, without doubt, a blight on the cryptocurrency industry, it is important to remember the old adage ‘do not paint with a broad brush’.
The OSC has, thankfully, recognized this, and taken the time to ensure readers that they are not condemning the sector as a whole, in their report.
“The misconduct we uncovered in relation to Quadriga is limited to Quadriga and should not be understood as applying to the crypto asset platform industry as a whole. Properly conducted, crypto asset trading is a legitimate and important component of our capital markets. We remain committed to working with this industry to foster innovation. Financial innovation has always been critical to the health of our economy and the competitiveness of our capital markets.”
Now we move on to the bad. After a thorough investigation, the OSC has determined that QuadrigaCX operated, essentially, as a Ponzi scheme underneath a ‘layer of modern tech’. This Ponzi scheme is believed to be orchestrated by the late founder of QuadrigaCX, Gerald Cotten.
Furthermore, due to the custody model utilized by the exchange, the OSC believes QuadrigaCX to have been in consistent violation of securities laws.
“…whereby Quadriga retained custody, control and possession of its clients’ crypto assets and only delivered assets to clients following a withdrawal request—meant that clients’ entitlements to the crypto assets held by Quadriga constituted securities or derivatives.”
To this day, many of those affected by the debacle caused by Cotten have remained hopeful that the lost keys to his crypto wallets would be found. This was due to a belief that these wallets contained much of the missing funds. Unfortunately, the OSC has indicated that this is a fallacy. Rather, the vast majority of missing funds were due to Cotten’s illegal trading activity.
“It has been widely speculated that the bulk of investor losses resulted from crypto assets becoming lost or inaccessible as a result of Cotten’s death. In our assessment, this was not the case. The evidence demonstrates that most of the $169 million asset shortfall resulted from Cotten’s fraudulent conduct, which took several forms.”
If that wasn’t bad enough, the OSC concedes that, due to the circumstances (QuadrigaCX bankruptcy, and Cotten’s death), there exists very little room for recourse.
In their report, the OSC notes that roughly $215 million is owed to QuadrigaCX customers. They provide the following breakdown, shedding light on where the money has gone.
- $115 million
- Lost by Gerald Cotten through illegal trades on QuadrigaCX
- $46 million
- Recovered funds, now in the possession of a trustee
- $28 million
- Lost by Gerald Cotten through illegal trades on external exchanges
- $23 million
- Miscellaneous losses yet to be accounted for
- $2 million
- Funds stolen by Gerald Cotten to fund his lifestyle
- $1 million
- Operational losses
Whether through misappropriation, or illegal trades, the late Gerald Cotten is believed to be directly responsible for roughly $145 million lost in client funds.
Words of Warning
Throughout their report, the OSC doesn’t mince words when addressing companies still operating in the blockchain industry – Contact the OSC to see if registration is required under current laws.
They explicitly note, on multiple occasions, that securities laws apply in many instances, even when the traded assets are not securities. The deciding factor comes down to how these assets are handled by exchanges.
“A platform would generally not be subject to securities legislation if the underlying crypto asset being traded is not a security or derivative, and there is immediate delivery of a crypto asset to the client after a transaction…In contrast, if a platform retains possession and control of the crypto assets being traded on the platform, securities law may apply.”
While this distinction may be small, it is an important one. The OSC is imploring Canadian exchanges to reach out and determine where they fall within regulatory guidelines.
“Platform operators should be aware that, depending on their business model, they may have to register with the OSC and they should take appropriate steps to comply with Ontario securities laws…Platforms should review their operations to ensure that they have procedures in place to manage risks to clients and that they are accurately disclosing key information about their operations to clients.”
The Ontario Securities Commission (OSC), is a regulatory body, tasked with ensuring fair and transparent markets. This is done through the creation, and enforcement, of laws surrounding securities in the province of Ontario.
CEO, Grant Vingoe, currently oversees company operations.