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TON Project Shutters its Doors as the SEC Prevails

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checkmate

Checkmate.

Like much of the world, we have been following, and reporting on, the situation developing around Telegram vs. SEC, for months now.

After a long battle, Telegram CEO, Pavel Durov, has announced that the company is giving up their battle against the SEC, and closing the doors on TON.

“I am writing this post to officially announce that Telegram’s active involvement with TON is over.”

Disdain for the U.S.

If one thing was made clear from the message, released by Pavel Durov, it is a certain level of disdain towards the regulators within the United States.  From an outside perspective, this is an understandable mindset.

When referencing a U.S. court decision to ban the global sale of GRAM tokens (not just within U.S. borders), Pavel Durov had the following to say.

“This court decision implies that other countries don’t have the sovereignty to decide what is good and what is bad for their own citizens.”

He continued

“…we, the people outside the US, can vote for our presidents and elect our parliaments, but we are still dependent on the United States when it comes to finance and technology (luckily not coffee). The US can use its control over the dollar and the global financial system to shut down any bank or bank account in the world. It can use its control over Apple and Google to remove apps from the App Store and Google Play. So yes, it is true that other countries do not have full sovereignty over what to allow on their territory. Unfortunately, we – the 96% of the world’s population living elsewhere – are dependent on decision makers elected by the 4% living in the US.”

A Timeline

Perhaps the best way to understand the timeline, surrounding events throughout this saga, is to look back at our past articles.

Arguably, the inciting incident, which ramped up tensions between Telegram and the SEC, dates back to September of 2019.  At this time, an email had leaked, which indicated the potential for Telegram to distribute GRAM tokens earlier than originally planned.

GRAM Token – Telegram Mulls Early Release

While rumblings of regulatory issues occurred prior to October 12th of 2019, is was on this date that the SEC filed for a restraining order against Telegram, and its subsidiary, TON.  At the time, representatives from the SEC stated, “Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold…”.

SEC Issues Emergency Action, Halting ‘Gram’ Issuance

From this point on, a fierce battle ensued, with the SEC maintaining the stance that GRAM tokens were, indeed, securities.  Along the way, Telegram did experience some small victories.  In January of 2020, they successfully convinced the presiding judge to deny the SEC access to Telegram’s full banking records.  These efforts by the SEC prompted strong words from Telegram, likening SEC efforts to a ‘fishing expedition’

District Court says ‘Request Denied’ to the SEC

Telegram Likens SEC Request to a ‘Fishing Expedition’

At this point, it wasn’t just news outlets that were taking notice of the situation.  February of 2020 marked the first time that an outside regulatory body was probed for their input on the situation.  In this instance, the courts reached out to the CFTC, asking how they would classify GRAM tokens per their standard practice.  While not solicited by the courts, outside groups, such as the Blockchain Association, also took the time to weigh in on the situation.

CFTC to Give its Stance on GRAM Token Classification

Blockchain Association (BA) Shows Errors in SEC Telegram ICO Case

By the time March of 2020 rolled around, investors were weary of the proceedings.  Between months of wondering what would happen to the project, and the growing COVID-19 pandemic, many had accepted the notion of a refund.

Telegram Investors Ready to Take Refunds Amid COVID-19 Pandemic

When news of interest in a payout broke, it was only weeks later that Telegram announced the first structuring of a potential investor refund program.  While this was welcome news for many, it was only a short time later that U.S. investors were made ineligible for this possibility.

Telegram Postpones GRAM Token Issuance and Offers Investors Refunds

U.S. Investors Ineligible for 110% Telegram Payout

 

That brings us to the present, ending a months long battle which saw both sides win small victories;  A process that saw token distribution delayed multiple times, outside influences, and refund programs derailed for many.

Lesson Learned

Regardless of whether you side with the SEC or Telegram, in this case, it served as a teaching tool for any company contemplating a similar path.

Perhaps, Telegram and the TON project were made examples of in the crypto-sector justly so – or maybe the SEC the U.S. Court did, indeed, overstep their bounds.  Perceptions fluctuate, however, this time around, Telegram was perceived to have been in the wrong.

For those interested in learning more about what distinguishes a security token from a utility token, make sure to peruse a past contribution to our ‘Thought Leaders’ series by Constantin Kogan of BitBull Capital.

The Howey Test: The Fine Line Between a Security Token and a Utility Token

Telegram

Telegram is a popular messaging platform, available on PC, iOS, and Android.  The TON project, was an endeavour built upon Telegram, which would facilitate the value transfer through the use of GRAM tokens.  While this project is now shut down, Telegram continues to operate, as popular as ever.

CEO, Pavel Durov, currently oversees company operations.

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Joshua Stoner is a multi-faceted working professional. He has a great interest in the revolutionary 'blockchain' technology. In addition to this, he is a licenced Paramedic in Nova Scotia, Canada. As such, he can provide emergency care/medicine to any situation necessitating it.

Regulation

New Framework Passed in Cayman Islands, Addressing Virtual Assets

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New Framework Passed in Cayman Islands, Addressing Virtual Assets

Legislative Framework

The Cayman Islands government has recently passed new framework, addressing the treatment of virtual assets, and AML, within the nation.

This framework, which was first put forth in early May of 2020, is comprised of 5 bills; each of which has the goal of facilitating a transparent, and safe, environment for market participants.  Finance Minister, Tara Rivers, noted the following points, elaborating on the goals of this framework.

  • Innovate financial services
  • Provide regulatory clarity
  • Protect consumers
  • Comply with FATF recommendations

By passing this framework, the Cayman Islands have put a good foot forward in their treatment surrounding virtual assets.

The Highlights

Found within this new framework are two notable highlights.

  • The Virtual Asset Service Provider Law
    • Under this newly passed law, virtual asset service providers (VASP) must register with the Cayman Islands Monetary Authority (CIMA)
  • Regulatory Sandbox
    • This ‘sandbox’ is essentially a program which allows for companies to test/prove the viability of new products and services, without the need for full licensing.

Legitimate Business

When commenting on the purpose of these bills, Finance Minister, Tara Rivers, indicated that one of the reasons behind this move is to attract ‘legitimate businesses’.

Cayman Islands has long been noted as a tax haven nation.  Due to friendly regulations surrounding taxation, businesses world-wide seek to ‘set-up-shop’ in the tiny Caribbean nation.

While this may have been the case at one point in time, regulators have been working hard to change this narrative/perception.  This new framework is just one such example, as it is structured to enforce compliance with international AML practices; in doing so, it is hoped that criminal activity, which often makes use of new technologies, will be abated.

Cayman Islands

With a population of roughly 65,000 people, Cayman Islands is one of the larger island nations found in the Caribbean.

On island, multiple regulatory bodies work together to ensure companies employ safe practices.  Two of these, which had a hand in the passing of this new framework, include:

  • The Caribbean Financial Action Task Force
  • The Cayman Islands Monetary Authority (CIMA)

In Other News

While a newly established sandbox within Cayman Islands is a good thing, they are not the first to take the leap in establishing such a program.  We recently took a look at another sandbox program, established by industry leading, Vertalo.  While the former is overseen by government regulators, the latter offers similar benefits; the ability to test out services in a low-risk environment.

Playing in the Tokenization Sandbox with Vertalo

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Regulation

Facebook’s Libra Wallet Calibra Rebrands to Novi Financial

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Calibra Rebrands to Novi Financial

This week, the company responsible for Facebook’s Libra wallet services, Calibra, announced a rebranding. The blockchain-based provider will now go by Novi. The rebranding demonstrates Facebook’s continued commitment to introduce the Libra project to the market, despite heavy opposition from lawmakers. Additionally, it signals a fresh marketing strategy on the part of the Libra team.

As part of the rebranding, Facebook created a new subsidiary – Novi Financial. Interestingly, the word Novi is derived from the Latin words “Novus via” which means “New way”. The name seems fitting as Libra developers search for a new way to get regulator approval for their advantageous project.

In a recent interview, company executives spoke publicly about the decision to rebrand the firm. Importantly, they stated that the name change didn’t change the companies commitment to bring financial service to all parts of the world. Executives explained that the rebrand was part of a larger strategy to bring the company more in line with the fluidity of cryptocurrencies and the overall goal of the Libra project.

Novi Details

According to developers, the Novi crypto wallet features a host of helpful features to support the Libra ecosystem. The Dapp will function as a standalone feature. However, it will have full interoperability within Facebook’s sphere of influence. This strategy would see the Novi wallet available to all Facebook, Messenger, and WhatsApp clients.

Potential Novi Wallet Users via Facebook

Potential Novi Wallet Users via Facebook

Notably, the wallet will offer users near-instantaneous transaction times. Additionally, users can send funds between each other at a fraction of the costs of traditional money sending services. Executives didn’t sate how the fee structure for the system will work, but they did say there would be no hidden fees. One is left to assume that the company intends to take a small percentage of each transaction.

Importantly, the Novi Wallet features built-in AML and KYC compliance mechanisms. Speaking on these systems, developers stated that users will need to verify their identity in various ways. These verification systems can include providing government-issued ID and verification video chats. Novi executives also didn’t give any details on a potential release date.

Their hesitant is well warranted as the Facebook Libra project continues to go through court proceeding with SEC regulators. To date, regulators have shown no sign of budging on their anti-Libra stance. Despite the current atmosphere of distrust, Facebook believes it has the capability to sway the tides.

SEC Taking Wins

Surely, Libra has a rocky road ahead of it. For one, the SEC continues to block any cryptocurrency projects presented from large social media platforms. A perfect example of their entanglement strategy occurred this week when Telegram withdrew its application for the TON blockchain ecosystem.

Novi to Bank

Regardless of the fate of Libra, Novi may still find a comfy home in the crypto sphere. For now, the entire crypto community awaits to see how Facebook plans to transform the mood of regulators and bring the Libra concept to light.

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Gold & Natural Resources

A First: Cryptoassets and Gold in EU Benchmark Compliant Index

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A First: Cryptoassets and Gold in EU Benchmark Compliant Index

CoinShares Group, the digital asset management firm took another step forward in establishing the presence of digital assets in the institutional investing space. 

CoinShares Launches New Digital Asset Index

The CoinShares Group announced the launch of the Coinshares Gold and Cryptoassets Index (CGCI). This is the first index that has exposure to a digital asset and is also compliant with the EU Benchmark Regulations (EU BMR).

A huge milestone for cryptoassets, as Bitcoin which is often touted as the digital version of gold as an asset class, becomes an integral part of a financial product for institutional investors that seek to have exposure to digital assets.

Moreover, the pairing with gold in this index is done to combine the high volatility of cryptoassets with the low volatility of the precious metal. The risk profile of the index is smoothed out considering that there is no high correlation between gold and Bitcoin, according to CoinShares Group.

The index methodology maintains a basket of 5 equally-weighted cryptoassets weighted against gold. There is no fixed list of cryptoassets eligible for being included, but the criteria is based on 6 month-rolling market capitalization and excludes any ERC-20 tokens and privacy-focused cryptoassets. 

The financial product goes through a re-balancing process, which occurs monthly, with the cryptoasset basket rebalances to include the top 5 eligible market cap weighted cryptocurrencies as of the time of rebalancing. The calculation of the index relies on Kaiko cryptocurrency market data along with Messari’s supply data – two leading data providers in the digital asset space.

Meanwhile, the weights between the cryptoasset basket and gold is determined based on a weighted-risk allocation scheme.

The development of the CGCI resulted from research conducted between CoinShares and Imperial College London, published in 2019, identifying that the pairing of gold and cryptoassets delivers a risk and return profile that is superior to holding either alone.

Cryptoassets Paired with Gold for Better Risk-Reward Profile

The index methodology was created from the research and experimentation conducted with the EU registered benchmark administrator, Compass Financial Technologies to ensure a robust and benchmark compliant index. As the first EU BMR compliant index, the CoinShares Gold and Cryptoassets Index is also live on popular financial data providers like Bloomberg Terminal and Refinitiv.

There are already several options for institutional investors to get exposure to cryptoassets, but with the high volatility of the market, investors may shy away from committing. This new weighted pairing with gold – one of the assets that is known to have a low volatility – allows investors to enter the digital asset space and benefit from higher returns while minimizing their exposure to volatility risk. 

The CoinShares Group already has a great track record in the cryptocurrency space with several financial products which include the first regulated Bitcoin hedge fund and the first exchange-traded Bitcoin product.

Daniel Masters, Executive Chairman of CoinShares believes this is a major step forward for the digital asset space drawing parallels with the institutional adoption of commodities, stating:

“Robustly researched and documented index products were the catalyst for institutional adoption of commodities in the late ’90’s through the advent of the Goldman Sachs Commodity Index. This crypto and gold index aims to do the same, by using academic research and its benchmark regulated status to pass muster with even the most stringent investment committees.”

The Evolving Space of Digital Assets

The digital asset space has been longing for the attention of institutional investors for some time. In the last couple of years there have been several incursions by big institutions into cryptoassets. Established traditional financial institutions like Fidelity or ICE have launched separate entities for the digital asset industry since then.

However the crown jewel for the crypto space remains to be an approved Bitcoin ETF by the SEC, which would cement the asset’s place in its separate category. Nonetheless this goal seems to be as elusive as two years ago.

Several applications from different asset management firms have been rebuffed by the regulatory authority, and each one of them citing reasons related to the supply side of the cryptocurrency market – the lacklustre custody options, the inaccurate price data and uncertainty over exchange volumes.

Even though the cryptocurrency space developed ever since and more custody solutions appeared for institutional investors, and data providers seem to have built more robust price indices, there is no talk of progress towards approval of  a Bitcoin ETF.

Maybe the key lies in the demand – when there is a sufficiently high institutional demand for digital assets, regulators may quickly change their tune.

CoinShares is part of this cohort of companies working to improve the infrastructure for digital asset financial products. With this new product, the company not only has the potential to generate institutional demand for cryptoassets, but also blazes a trail for further product innovation for others in the space.

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