The hugely popular messaging app, Telegram enjoyed a short-lived win in court against the Securities and Exchange Commission (SEC) this week. A federal judge denied the SEC’s request for Telegram to hand over all bank statements before January 8th regarding its TON blockchain project. Unfortunately, the mounting legal ramifications coupled with the more aggressive stance taken by the SEC following the start of the trial has made company executives reconsider their TON strategy altogether.
Telegram has been enthralled in a case with the SEC over the development of its TON blockchain and Gram cryptocurrency for months. In October, the SEC sued Telegram. According to SEC documentation, the firm alleges that Telegram violated numerous federal securities laws during its record-breaking 2017 $1.7 billion initial token offering (ICO).
Defending the TON Blockchain
For its part, Telegram put up a hefty defense. The company claimed that Grams are utility tokens. Therefore, they fall outside SEC jurisdiction. In turn, the SEC saw these actions as a slap in the face. Consequently, the group decided to expand its investigation. Now the SEC doesn’t just want to stop the sales of Gram tokens, the group seeks to call into question the validity of the company’s 2017 ICO.
The SEC claims that Telegram engaged in fraudulent activities during its fundraising campaign. This pivot towards a more aggressive prosecution of the firm comes after SEC officials accused Telegram of stalling and making excuses regarding the group’s request for investor information. Ironically, its exactly this request which has put Telegram in a bit of a quagmire.
Small Win for the TON Blockchain
Federal Judge, Kevin Castel of the Southern District of New York is the official preceding over the case. He handed Telegram a small victory in court this week after postponing the SEC’s demand for investor information. Telegram denied the ability to provide this info by the requested January 8th deadline because it would violate EU consumer protection laws. Basically, EU privacy requirements mandate that the firm remove all personal information from EU citizens files before handing them over to a foreign government.
Judge Castel did, however, let Telegram officials know that the denial was really more of just a postponement. He stated that in the “not-too-distant future” the firm would need to provide the requested bank statements to the SEC. The added time frame gives Telegram a chance to produce such records without violating any foreign data privacy laws.
Rethinking the TON Blockchain Concept
Following the increased SEC pressure, Telegram officials decided it was best to abandon some of the most critical parts of its TON blockchain strategy. In a recent blog post, the firm shed some light on the monumental changes executives decided on. For one, Telegram will no longer integrate its Gram cryptocurrency wallet into the Telegram Messenger. Basically, the wallet will be available solely on a stand-alone basis.
The post was equally damming for the TON blockchain project. Company officials stated that they have no plans to maintain or develop future applications for the TON blockchain. In fact, the company stated that it hopes that third-party developers will step in to keep the blockchain functioning via some newly founded foundation.
Massive Blow to TON Blockchain Investors
The decision to not integrate the TON ecosystem into the Telegram messenger is a massive blow to investors. Telegram has over 200 million monthly active users. The direct integration of TON into the platform would have provided the system with a huge advantage over the competition. Starting the concept with a giant captive market and giving users instant and seamless access to Gram tokens was the main driving force behind most investor’s decision to become a part of the TON blockchain.
To drive the post home, Telegram made a public statement, which is more of a legal disclaimer. In the disclaimer, the company stated some surprising facts. For one, Telegram claims that it never “made any promises or commitments to develop any applications or features for the TON Blockchain.” This post left TON investors wondering what is to happen to their capital now that the project’s main draws are no longer the reality.
Telegram – TON Caught in the Cross Hairs
Considering the sheer size of Telegram’s 2017 ICO, it’s not a huge surprise to see that the SEC decided to put some pressure on the firm. Unfortunately, the SEC has now left TON investors holding the bag, as the firm has all but abandoned their crypto dreams.
Is it Hoax?
There are some analysts that believe that the new tactics displayed from Telegram are actually part of a larger strategy. They see the maneuvers as a way to ease the platform into existence. By producing the TON blockchain and wallet as a separate entity, Telegram can avoid much of the fear and disdain regulators and lawmakers have shown thus far.
Much of this negative press can be attributed to the spillover from Facebook’s Libra project. Government officials are not keen on huge social media platforms entering the crypto sector. Already, lawmakers from both sides of the aisle have put forth stifling regulatory bills to slow the adoption of cryptocurrencies by these tech behemoths. The question now remains, will these regulations be enough to halt these projects? In the case of the TON blockchain, it appears that they were.
TON – A Dream Lost
It’s sad to see a concept as advantageous as the TON blockchain dismantled slowly. The sheer size of Telegram’s network would have significantly boosted cryptocurrency adoption globally. Analysts pointed towards massive social media networks as one of the fastest ways to integrate cryptocurrency use in an effective manner. Unfortunately, its exactly this large scale adoption that has lawmakers and regulators on edge.
No Grams for You
Despite strong support from investors, and a record-breaking ICO, it now looks as if the entire TON blockchain project has come into question. Hopefully, Telegram and the SEC find a mutual understanding. If so, it could allow for the continuation of the development of this unique and game-changing blockchain. For now, the cryptocommunity awaits to see both the SEC’s and Telegram’s final response.
SEC Provides Warning on ‘Initial Exchange Offerings (IEOs)’
Capital generation events can come in many different forms. For those involved in the world of blockchain, the terms ICO, STO, and DSO have most likely become common terminology. Another variant of these type of events is known as the IEO or ‘Initial Exchange Offering’.
Since first capturing investors’ attentions in early 2019, IEOs have gone on to largely replace the ICO, as they are commonly viewed as a safer means of practice. This sense of security is often due to the belief that projects are legitimate, since they are being hosted on an exchange, and that they represent better investment opportunities.
They, however, do not come free of danger. The Securities and Exchange Commission (SEC) has recently released a notice/warning to those that have taken, or are thinking of taking, part in an IEO.
In their notice, the SEC clearly iterates that ‘there is no such thing as an SEC-approved IEO’. Even if not making this claim, the SEC warns that many IEOs may be selling securities disguised at utility tokens (intentionally or not).
Whats the Difference?
When IEOs were first rising in popularity, we were fortunate to have guest contributor, Liza Aizupiete (Managing Director at Fintelum), share her thoughts. In her contribution, Aizupiete touches on the differences between what constitutes an ICO versus an IEO.
Are They Worth Your Time?
Our very own Antoine Tardif, CEO of Securities.io, also took the time to pen his thoughts on the recent performance of IEOs. His findings led him to the conclusion that, “what is currently more important than the actual project being listed, is where the project is listed. We anticipate that once regulated security tokens increase in popularity, that IEOs may be an enticing option to list these security tokens on regulated exchanges. This would be similar to how stock exchanges currently operate.”
While the SEC address a variety of points in their notice, there are two statements in particular that shed light on to their stance. The following are excerpts from their notice, demonstrating this.
Is the IEO a securities offering?
“There are important issues investors should be aware of before investing in an IEO. As in the case of ICOs, depending on the facts and circumstances of the offering, the offering may involve the offer and sale of securities. This means the IEO may be subject to registration requirements that apply to offerings under the federal securities laws. Among other things, registration means that the company offering the digital asset has to provide important disclosures about itself, its business, the digital asset offered, and the terms of the offering to investors.”
Is the platform a securities exchange?
“In addition, if the IEO involves securities, the online trading platform on which the IEO is being offered may need to register with the SEC separately as a national securities exchange or operate pursuant to an exemption, such as an alternative trading system (ATS). An ATS must be a registered broker-dealer and comply with applicable requirements in order to legally operate in the United States.
The federal laws and regulations governing registered national securities exchanges and ATSs are designed to protect investors and prevent fraudulent and manipulative trading practices. Many online trading platforms may give the misimpression to investors that they are registered or meet the regulatory requirements for a national securities exchange or ATS, and therefore may lack the investor protections that a national securities exchange or an ATS provide to investors.”
The Securities and Exchange Commission is a U.S. based regulatory body, tasked with creating and enforcing laws which pertain to assets deemed securities. The goal of this is to foster the growth of a fair and transparent market for all participants.
Chairman, Jay Clayton, currently oversees operations within the SEC.
In Other News
Beyond simply reiterating their stance on what constitutes a security, and subsequent warnings on potentially violating regulations, the SEC has been hard at work. One example of their other endeavours is a recent proposal put forth, which would see various amendments made to the definition of an ‘accredited investor’.
After Months of Silence by ICOBox, the SEC Seeks ‘Default Judgement’ and ‘Permanent Enjoinment’
Beginning roughly 4 months ago, the SEC set their sights on ICOBox, and actions taken by the company and its founder throughout 2017. The SEC states,
“ICOBox, an incubator for digital asset startups, was founded in mid-2017 by Evdokimov, its CEO and “vision director”. To raise funds, defendants sold approximately $14.6 million worth of securities in the form of digital assets called “ICOS” tokens. Between August 9, 2017 and September 15, 2017, defendants sold ICOS tokens to over 2,000 investors, in the United States and globally…By not registering the offering with the SEC, defendants violated the securities laws’ registration requirements”
Unfortunately, despite being made aware of the various charges laid against them, the SEC and Courts have been met with nothing but silence.
The aforementioned lack of response has led to the recent developments, to be discussed here today. By failing to respond to the SEC’s filing, in September of 2019, ICOBox and its Founder, Nikolay Evdokimov, have essentially forced their hand.
Backed into a corner by the silence demonstrated by ICOBox, the SEC has filed for a ‘default judgment’ on their accusations of alleged securities violations. Simply put, a ‘default judgement’ refers to a ruling put forth by a Judge, when presented with a case where the defendants remain absent from the proceedings without valid reasoning.
While there existed the possibility of defending their actions, should a default judgement be awarded, ICOBox essentially forfeits this right.
While a default judgement is being sought, the SEC has not stopped there. In their recent filing to the courts, the SEC attempts to build a case, which demonstrates the intimate nature between ICOBox and its founder, Nikolay Evdokimov.
The SEC hopes to show that Evdokimov was, not only the face of the company both internally and externally, but that he had a direct hand in the actions undertaken by ICOBox.
In doing so, the SEC hopes for the court to award a ‘permanent enjoinment’ of, both, the company and its founder. A ‘permanent enjoinment’ refers to a court enforced prohibition of certain activities imposed upon specific entities – in this case, ICOBox and Evdokimov.
When this saga first began, in September of 2019, we reported on the initial steps taken by the SEC. The allegations raised by the regulatory body, at that time, are only now coming to an end, as they look to close out the case and move on.
Requests of the Court
In their filing, the SEC elaborates on the various infractions committed by the company and its founder. They proceed to list various suggested/requested actions to be taken by the court against the defendants. The following are a few examples of their requests.
- ICOBox and Evdokimov should be permanently enjoined
- The Court should order joint and several disgorgement with prejudgment interest
- The Court should order second tier penalties against Evdokimov
- Default Judgement Should be Entered Without Delay
Launched in 2017, ICOBox was a service provider for companies looking to host token based capital generation events, such as ICOs and STOs. Since their inception, ICOBox has helped its clients raise over $650M, in addition to raising over $14M in funds through their very own ICO.
Company operations were overseen by Founder, and CEO, Nikolay Evdokimov.
In Other News
While every case surrounding illegal activity brought forth by the SEC is an important one, there are two, in particular, that have found themselves creating headlines in recent months. These would be the situations developing around, both, Ripple and Telegram. Each of these companies have been accused of actions violating existing securities laws. On various occasions we have covered these events as they develop. To learn more about these on-going cases, make sure to peruse the following articles.
Qatar Bans All Cryptocurrency in QFC
In a surprising turn of events, The Qatar Financial Centre (QFC) announced that it would ban all cryptocurrency-related activities within the sector. The news comes as a shock as Qatar has was seen as a leader in terms of blockchain adoption in the region. Now, government officials are voicing concerns over money laundering and terrorist financing as a means to stifle local crypto activities.
News of the crypto ban came via a report by the Qatar Financial Centre Regulatory Authority (QFCRA). In the now-infamous report, the QFCRA stated that all services involving cryptocurrencies are now illegal within the exclusive economic zone. Specifically listed in the report are critical components to the market. These components include crypto to crypto trades and crypto to fiat exchanges. Also, the report directly lists virtual asset services including those that facilitate the trading, custody, and issuance of virtual assets in any form or manner.
Security Tokens Safe
Interestingly, the report doesn’t ban security tokens. In fact, these unique financial instruments remain unaffected by the new legislation. The report states that financial instruments regulated by the QFCRA, the Qatar Central Bank, or the Qatar Financial Markets Authority are exempt from the ban. This makes sense from Qatar’s standpoint because these tokens undergo full AML and KYC verification.
Discussing the decision, Sheikh Abdulla bin Saoud Al-Thani, the governor of Qatar’s Central Bank pointed to a few key points as to why the regulations make sense. He stated that a correlated effort needed to be put forth to combat money laundering and terrorist financing. He believes that only a stricter and effective regulatory and legislative framework can accomplish this task.
It appears as if this latest maneuver is actually just a part of Qatar’s overall new approach towards combating money laundering. Recently, the country instituted wide-sweeping AML legislation. All of these laws seek to curb those attempting to hide money from the government.
The Qatar Financial Centre – QFC
The QFC is a special jurisdiction within the country designed to spur economic growth. Companies that call the QFC home get access to a host of exclusive benefits. These benefits include reduced legal, business, tax, and regulatory infrastructure. In this way, Qatar seeks to attract businesses and facilitate economic development moving forward.
Tighter Regulations Globally
Qatar’s decision to add more regulations to the crypto sector mirrors that of numerous other countries. Just recently, US lawmakers proposed new legislation to bring much of the crypto market under the jurisdiction of regulators. If the new bills receive approval, there would be wide-sweeping implications for the industry.
Additionally, EU Lawmakers have come up with new legislation as well. On January 10th, 2020, the European Union (EU) will initiate the Fifth Anti-Money Laundering Directive (5AMLD). This new law requires that all digital asset platforms and even wallet providers verify and record customer identities.
Qatar Steps Backwards
As Qatar attempts to gain more control over the use and trading of digital assets within its border, it may find that these new regulations have an adverse effect. Cryptocurrencies, many of which are designed to function anonymously, are not so easily regulated and monitored. For now, Qatar will see exactly what it takes to police the digital realm as they start the enforcement of their new crypto legislation.
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