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Court Supports Telegram’s Refusal To Submit Bank Records To The SEC

District Court of the Southern District of New York published an ‘Order on Motion to Compel’ pertaining to a long-running investigation on behalf of the Securities and Exchange Commission (SEC) into Telegram, and its TON blockchain and ‘grams’ cryptocurrency projects.

The two-page long document details a ‘telephone conference’ held between representatives of the court, the SEC, and Telegram. It clarifies that it is not placing any “restrictions” on the SEC’s “ability to question witnesses regarding the issues raised in plaintiff’s January 2 Letter”.

After this, the order explicitly denies the commission “application to compel the production of the defendant’s bank records” whilst communicating an agreement that Telegram has until January 9, 2020 to present a “proposed schedule” for a review of its financial reports in full compliance with “foreign data privacy laws”.

Earlier in the week, Telegram refused to share its bank records with the Securities and Exchange Commission (SEC), after the commission made demands for explanation of the expenditure of funds raised from investors in the ‘Grams’ token and TON blockchain.

The SEC asserts that these funds were raised, at least partially, through an unregistered (and thus, illegitimate) securities sale – a classification which the commission has assigned to the ‘grams’ token.

According to the SEC, a cryptocurrency can be classified as a ‘utility’ or ‘security.

  • A security would be a token which is directly or indirectly sold to retail or institutional investors under advertisements or explicit expectation of future appreciation.
  • A utility, conversely, would be sold as a means of accessing a product or service.

A key difference between the two is that a security is further defined by how investment money is spent. Any profits raised from such sales would typically be used as a means of funding a project – money without which the project may not have been able to be developed.

Encrypted messaging platform Telegram has been in dispute with the SEC over its forthcoming token and blockchain since October 2019, when the authority sued Telegram for having allegedly broken federal securities laws with its ICO.

It appears that the SEC and other regulators are attempting to use every opportunity they have to make negative examples out of high capital organisations issuing digital currency tokens, with an effect of dissuading future investors and depreciating the value of existing projects.

This belief that is reinforced by the fact that, on the same day as news broke regarding the lawsuit, the commission issued a rare joint statement with fellow regulators: the Financial Crimes Enforcement Network (FinCEN) and the Commodity Futures Trading Commission (CFTC).

Telegram isn’t the first nor is it likely to be the last well-known social media brand to attempt to get involved with cryptocurrency – or to face off against the SEC as a result.

Last October the Facebook-led ‘Libra’ project saw the departure of many significant founding members for similar reasons. Due to a lack of clarity in existing regulations however, the commission has failed to yet conclude whether Libra’s associated token(s) could be considered a security or a utility.

Additionally: Kik effectively martyred itself for its ‘Kin’ cryptocurrency project by announcing that it would be shutting down its messaging service to focus resources after its own financial penalties resulting from an SEC lawsuit.