SEC blocks the Telegram ICO – what this means, and what happens now

https://davidgerard.co.uk/blockchain/2019/10/13/sec-blocks-the-telegram-ico-what-this-means-and-what-happens-now/

by davidgerard • 7 years ago

157 96 7 years ago

davidgerard.co.uk

dang• 7 years ago

Recent related thread: https://news.ycombinator.com/item?id=21228415

JumpCrisscross7• 7 years ago

Telegram refused to accept a subpoena

Within the sea of stupid that was this endeavour—single-issuer token pretending not to be a security, the wholesale scam that are SAFTs—this really takes the cake.

snagglegaggle7• 7 years ago

I think that's arguable. You're completely within your rights to refuse an unlawful order from a police officer. That it usually would lead to you getting shot reflects poorly on our society, not on the judgement of the person refusing the unlawful order.

JumpCrisscross7• 7 years ago

You're completely within your rights to refuse an unlawful order from a police officer

Subpoenas are court-ordered requests for documents. If you disagree with them, you fight them in court.

EpicEng2• 7 years ago

Which order is unlawful in your mind?

throw_m2393393• 7 years ago

How is that subpoena "unlawful"?

paveldurov• 7 years ago

If you'd like to join our legal team you can reply with your résumé!

mikece• 7 years ago

So it's not that the blockchain or exchange systems where insecure, only that tokens available at the ICO were being sold below par to investors? Setting aside the giant red flag that is refusing to accept a subpoena, if the ICO tokens are revalued to take away the discount to early investors would it then be legal?

JumpCrisscross7• 7 years ago

if the ICO tokens are revalued to take away the discount to early investors would it then be legal?

No. The tokens are securities. They are issued by a single issuer to fund development of a product which doesn’t presently exist, with early investors in SAFTs buying them on expectation of profit.

In any case, how would you value the discount? You don’t know the price until a market exists. And by that point, the 171 early investors have already dumped their pump on retail investors.

davidgerard5• 7 years ago

It's worth noting that quite a lot of the VCs in question had already written off their investments in 2017-2018 shitcoin ICOs.

This is why said VCs were suggesting to Coinbase last month that they list all these shitcoins that nobody even trades now, but which the VCs just happen to be holding massive bags of: https://blog.coinbase.com/coinbase-continues-to-explore-supp...

bagholder-alert• 7 years ago

You imply that Telegrams “Gram” has any buyers other than the early bagholders.

throw_m2393393• 7 years ago

Is it the same stunt as Bitfinex and LEO backed by USDT "backed" by dollars? How is the lawsuit working for NY attorney General by the way? These guy just feel untouchable… it's unbelievable what they can get away with…

jorvi3• 7 years ago

The Telegram Open Network is probably dead. The emergency order stops Telegram from “delivering Grams to any persons, or taking any other steps to effect any unregistered offer or sale of Grams.” This is worldwide — not just for the US.

This completely blows my mind. How does the SEC have any power in telling a hypothetical European situated in Europe if they can or can't buy Gram from European sellers..?

SpicyLemonZest• 7 years ago

That's how it generally works. If you're subject to a court's jurisdiction, and the court orders you not to do something, you can't dodge the order by just doing it in some place where the court doesn't have jurisdiction.

jorvi3• 7 years ago

But that is not how it generally works. If Unilever gets told by a UK court they can't sell peanut butter because that court doesn't like peanut butter, it doesn't mean Unilever is suddenly forbidden from selling peanut butter in the USA.

Edit: to clear up the analogy - UK courts don't have a say over what Unilever can and can't sell in USA jurisdiction. Likewise, the SEC can (should?) only regulate trade within USA jurisdiction or by USA entities. If Telegram wants to sell Grams on the UK market, Telegram should be able to tell the SEC to go pound sand, as any USA court orders don't mean jack outside that jurisdiction

throw_m2393393• 7 years ago

As soon as you are doing business with American citizens, the SEC can and will get involved so I imagine Telegram sold Grams to americans.

chubs• 7 years ago

I don't understand why the SEC (america) has jurisdiction to 'block' Telegram's operations (legal domicile in London) - am I missing something here?

JumpCrisscross7• 7 years ago

I don't understand why the SEC (america) has jurisdiction to 'block' Telegram's operations (legal domicile in London)

Because Telegram “committed to flood the U.S. capital markets with billions of Grams by October 31, 2019” and “sold more than 1 billion Grams to 39 U.S. Purchasers, raising $424.5 million from the U.S. market” [1].

[1] https://www.sec.gov/litigation/complaints/2019/comp-pr2019-2...

detaro• 7 years ago

They're active in the US, selling to US investors, ...

seibelj3• 7 years ago

Alternative: telegram launches anyway, and the SEC does... what exactly? Bans them from being traded on US exchanges? It would be impossible to stop the software, just as they can’t stop bitcoin.

JumpCrisscross7• 7 years ago

telegram launches anyway, and the SEC does... what exactly?

Refers Telegram to the DoJ for criminal prosecution, which results in bank accounts being frozen, any SAFT holders (or anyone else) who sold their Grams being on the hook to the buyers, and the seizure of Telegram’s assets in America and anywhere else with a mutual prosecution treaty, which covers much of the EU.

At the point of wilfully defying a court order to sell securities, it becomes fraud and potentially money laundering.

seibelj3• 7 years ago

But these are foreign corporations? I think I’m confused about how Russians, with offshore corporations, and foreign bank accounts, can suddenly be banhammered by the SEC...

rolltiide• 7 years ago

do eeeeeet

ThinkBeat• 7 years ago

That would be an interesting situation.

I feel sure that the US would finds ways of shutting it down, but the idea of just going ahead with their plans and maybe block the US from their network would be legally and politically interesting to watch.

negamax2• 7 years ago

But this is indeed about money. Why tie up a crypto token with a messenger otherwise. No US, no money. That's how it is. I wish SEC had fined EOS more though

justapassenger• 7 years ago

It would be impossible to stop the software, just as they can’t stop bitcoin.

That’s very naive approach. Just because technology is solid, doesn’t mean that government is going to give up. Remember, governments are only entities in the world that are allowed to seize all your assets, throw you in jail and sometime kill you.

People in tech tend to overestimate value of technology and underestimate power of regulations and governments (I only realized it myself few years ago). I feel that we need to update this xkcd, to talk about regulations - https://xkcd.com/538/

H8crilA2• 7 years ago

But why wouldn't they register? It really sounds like trying to make this harder than it is.

Isn't it true that the whole crypto world dreams of mass adoption? Well guess what - institutional money would greatly appreciate a valid S-1/F-1 filing in EDGAR.

semiotagonal• 7 years ago

It would be impossible to stop the software, just as they can’t stop bitcoin.

It seems impossible when you think about it for a little while, but when someone thinks long and hard about it because it's their full-time government job, maybe someone finds a way.

schmichael4• 7 years ago

With each new cryptocurrency drama due to flouting AML/KYC regulations, flouting securities regulations, collapsing/exit-scamming exchanges, murders, drugs, sex trafficking, let's not forget:

PoW is an ecologically irresponsible algorithm.[1]

Altogether cryptocurrency is such a terrifyingly irresponsible ecosystem, I'm surprised anyone wants to be involved in it.

[1] https://www.sciencedirect.com/science/article/pii/S221462961...

ajconway• 7 years ago

This one is PoS though.

schmichael4• 7 years ago

Supposedly, AFAIK it's vaporware and may never be released.

Even if it is functional PoS (which sounds like a codified plutocracy, but I could be wrong), they still managed to botch securities regulations. Even if they sneak past that somehow, it seems likely they'll also fall afoul of AML/KYC regulations.

Maybe not! Maybe they're finally the ones who will do it all! Legal and ecologically responsible! If so they're off to a very bad start.

austhrow743• 7 years ago

Isn't all that the stuff that makes crypto exciting? Its the wild west come again. A new frontier. Appeals to the desire to expose oneself to risks for profit. To do something that maybe you shouldn't. To operate outside of the soft, protected existence of mainstream first world society. Bowl without the bumper bars.

Absent that emotional fulfilment its just boring old money.

schmichael4• 7 years ago

I know "wild west" is a popular analogy, but I fear people may forget it was awful.

Native peoples were slaughtered and forced off their land. Natural resources were mined and hunted with no regard for long-term sustainability. There was slave labor, sex trafficking, and endless profiteering based on speculation or downright lies. The rich got richer and maybe some poor people got a leg up? A whole lot of people ended up poorer, sicker, or dead.

So yeah, maybe cryptocurrencies are a bit like the wild west.

There are ways of taking risks, exploring, and pushing boundaries that don't put vulnerable people at greater risk. As far as I can tell the wild west and cryptocurrencies aren't it.

loceng• 7 years ago

Hype as the solution to boredom is a symptom of intelligent, capable people, not being tasked with valuable work they feel passionate about. I'd argue this is heavily due to built-in friction into our systems of indoctrination, educational pathways and a lack of basic foundation of capital to survive from - e.g. to develop your ideas, your skills - perhaps coding and designing, story telling to better, more eloquently express yourself and your ideas - all necessary skills to become a leader, to manage an organization - to organize.

DaiPlusPlus• 7 years ago

Besides proof-of-work and proof-of-stake, I’m surprised the more ecologically-friendly proof-of-space system isn’t being looked at harder. FileCoin uses it (it’s integral to the system to prove you have the space you’re selling) but it could also be used by other distributed Blockchains to prove that a node’s operator has invested in the ecosystem (by buying lots of storage) - I’d say I’d prefer to run out of HDD supply than destroy the earth through fossil-fuel power plant emissions.

schmichael4• 7 years ago

Does Proof of Space work? I seem to remember there being fundamental issues FileCoin hadn't resolved, but I probably last looked into it months or years ago.

Maybe this? https://github.com/filecoin-project/research/blob/master/ope...

I don't have the time/desire right now to figure out how the project is doing and the soundness of the approach.

avhwl• 7 years ago

Proof-of-Capacity schemes would incur ecological cost as well, replacing a constantly escalating energy demand for a constantly escalating rare-earth metal demand.

davidgerard5• 7 years ago

Proof-of-space rapidly goes to the price of the cheapest bulk storage, which is who can rent space on AWS cheapest, per David S. H. Rosenthal:

https://blog.dshr.org/2018/03/proofs-of-space.html

https://blog.dshr.org/2018/09/chia-network.html

Note also that it is possible at low cost to rent very large amounts of storage and computation for short periods of time in order to mount a 51% attack on a PoSp/VDP network in the same way that "mining as a service" enables 51% attacks on alt-coins.
For example, a back-of-the-envelope computation of a hour-long Petabyte attack at Amazon would start by using about 7 days of AWS Free Tier to write the data to the sc1 version of Elastic Block Storage. The EBS would cost $35/PB/hr, so the setup would cost $2940. Then the actual hour-long attack would cost $35, for a total of just under $3000.
I'm skeptical that the low-reward approach to maintaining decentralization is viable.

woah• 7 years ago

If Filecoin works (still haven’t shipped), then it’s unclear whether it’s less wasteful than PoW. This is because coins are mined by using up hard drive capacity, whether or not useful data is stored. The theory is that it will be better to store useful data for people because miners will get paid for that in addition to the mined coins. You could have a situation where 99 percent of the storage used in Filecoin is storing junk.

knopkop_• 7 years ago

Burstcoin uses proof-of-space. IIRC it was launched in 2014.

noxer4• 7 years ago

No serious digital asset still uses PoW or at least is on the way to ditch PoW. If you look at the most popular tokens/coins you'll see all the PoW coins are useless and no one is developing anything for them. They are just there to speculate and because people can't let go. TON uses PoS btw.

spurdoman77• 7 years ago

Usually when I visit web shops accepting cryptos as a payment all top coins accepted are pow coins.

babaeth• 7 years ago

Altogether cryptocurrency is such a terrifyingly irresponsible ecosystem, I'm surprised anyone wants to be involved in it.

Here are some reasons why people might be interested in the cryptocurrencies ecosystem:

- Paying 3% per credit card transactions isn't efficient

- Decentralized Finance matters. The DeFi movement is actually really interesting. You should look into decentralized lending protocols with stablecoins.

- Decentralized Governance is exciting and can facilitate new experiments like Quadratic voting

robcohen• 7 years ago

PoW is arguably ecologically irresponsible, but PoS consensus should fix that issue. Have you read the ouroboros papers?

https://eprint.iacr.org/2018/378.pdf

sanbor• 7 years ago

The web could also be associated with all those subjects, but despite that there is value in the world wide web. Regarding the environmental impact of Bitcoin, pre-mined coins like Telegram ICO solves that problem.

aey2• 7 years ago

SEC is blocking their launch. On the face of it, telegram has been complient with the SEC up to now and have filed exemptions for their sale.

https://www.sec.gov/Archives/edgar/data/1729650/000095017218...

On their own discounts are not illegal.

I think what’s obvious is that the network is not truly decentralized and depends on telegram and investors expect to profit from telegrams work on the network. So they should probably file an s-1 and follow the blockstack route.

What would have been ironic, is if TON was truly decentralized and independent of telegram than the network would have been launched anyways.

snagglegaggle7• 7 years ago

I think what’s obvious is that the network is not truly decentralized and depends on telegram and investors expect to profit from telegrams work on the network.

This matches exactly the concept of collectible items. In fact, there's a blockchain based TCG: https://godsunchained.com/.

Is the point of the card packs not in large part speculation? One card apparently went for ~$60k, and there is a discount being offered for early buy-in.

aey2• 7 years ago

Eh, magic cards have independent value from the company, and MtG sells them at a fixed price to consumers.

If you want a decentralized TON, get all the investors together and launch a genesis block with the open source code. That’s basically what EOS did.

noxer4• 7 years ago

Read their paper, they stated form the beginning that TON isn't able to launch decentralized. The initial investment to run a node is to high so they can't just put some binary on the net and ask people to run it. They planed to run every node in the beginning to show that it works and then everyone can join (with no control over who joins) but to join you have to have GRAMs so by stooping them to distribute grams they basically made it impossible to decentralized. Although they could still give out GRAMs, start the network and just ignore the SEC. Technically the network would decentralize over time but for that to happen there must be a market for GRAMs. Who's gonna obtain "illegal" GAMS to run a node and get paid with "illegal" GRAMs which can only be sold "illegal" again. And even people would do the services on TON are meant to be used by the masses if they can't simply buy GRAMs the whole thing can't fuel itself.

aakilfernandes2• 7 years ago

The author of this article is turning inches into miles. SAFTs aren't dead. The SEC is alleging Telegram has failed to deliver the promises it has made, so the SEC is pre-emptively stating they need to halt delivery. Presumably, once they complete their promises they'll be able to deliver Grams.

From the SEC Complaint:

The Whitepaper spoke of potential future products and services that investors could use in connection with Grams, but also made clear that these products were not available at the time the Offering began and would not be available by the time Defendants delivered Grams to Initial Purchasers.

Telegram, however, does seem to be in a pickle regarding the PoS consensus model. The SEC seems to be alleging that in order for the network to be sufficiently decentralized, having only qualified investors staking is not enough.

Also from the SEC complaint:

Defendants knew, however, that to actually implement the TON Blockchain in the real world, the project would require “numerosity”: a widespread distribution and use of Grams across the globe. Indeed, by definition, the TON Blockchain can only become truly decentralized (as contemplated and promoted in the Offering Documents) if Grams holders other than the original Grams purchasers actually stake Grams and, thereby, act as “validators” of transactions on the TON Blockchain. Stated differently, if the original Grams purchasers alone all immediately staked their holdings, the TON Blockchain would be centralized rather than decentralized and, therefore, subject to misuse and majority attacks. This fundamental need for additional Grams holders demonstrates that the TON Blockchain was designed from inception to require the Initial Purchasers to immediately distribute their holdings to the public.

H8crilA2• 7 years ago

Indeed what they want is an S-1 or an F-1 form filling. A security registration. That's it. The SEC has no opinion on the offering other than they think it's a security (this claim itself could also be challenged), and as such has to be registered under the 1933 act.

cwyers• 7 years ago

What are the odds that Telegram, despite believing they didn't need to do an S-1 or F-1 form filing, complied with the letter of everything that the form filing is intended to determine? They would likely have to materially change the offering so that the form filing didn't invite another action.

davidgerard5• 7 years ago

(author here) nah, pretty sure SAFTs are dead. The whole point of the SAFT rigmarole was to sell tokens as securities but not have them be securities on delivery, pretty much as Telegram was planning to do here - the point was not to be considered securities by the SEC.

This complaint demonstrates what the SEC think of the idea, i.e. they don't care and will look at how your token actually works and whether this is an investment contract under the Howey test.

But as I said - maybe Telegram will prevail in court! Do you feel lucky?

rjknight• 7 years ago

I think the argument could be a bit clearer here.

A SAFT allows a party to offer the delivery of tokens at some point in the future. This offering is a securities offering under US law, and therefore has to comply with the relevant regulations. In practical terms, that means filing some forms with the SEC, ranging from fairly lightweight forms if you're offering the SAFT privately without marketing, to increasingly heavy burdens if you want to market it, and the "mini-IPO" leavels of bureaucracy that would attach to a Reg A+ offering. So, it's perfectly possible to offer a compliant SAFT if you do it right.

The problem comes when the tokens are to be delivered (which was imminent, in Telegram's case). The SEC argues that not only was the SAFT contract a security, but the rights offered to Gram holders are themselves constitutive of a security, despite not being registered as such.

The SAFT is a security, but one for which Telegram appears to have been mostly compliant. The tokens themselves, which are set to be delivered to those original investors, are not registered as securities, and this is the problem, because the plan is to distribute those widely to the public, or "retail investors" as they would be regarded in the context of a securities offering.

If the Gram token were not a security, designed in such a way as to avoid triggering the Howey test, then there would be no problem (aside from Telegram's other problems, but I'm keeping the scope narrow here).

So the "SAFT is dead" argument isn't that the SAFT is automatically non-compliant, or that nobody can do a compliant SAFT offering, but instead is this: that some people in the blockchain community erroneously encouraged the belief that whilst a SAFT offering is a securities offering, the tokens that result from the investment are somehow prevented from becoming securities because the "security-ness" stuck to the SAFT itself, and that this view was wrong.

This gets tricky to discuss because the SAFT contract is basically fine, but the mistaken understanding of what a SAFT can do in practice is what allowed people to believe that selling Grams to the general public was likely to be a non-regulated activity. So, that interpretation of what SAFTs can do is dead, yes. For my part, it's not something that I ever believed, so it doesn't register as being the real news here.

aakilfernandes2• 7 years ago

they don't care and will look at how your token actually works and whether this is an investment contract under the Howey test.

This is 100% correct, but you're making the wrong conclusion. You're concluding the SEC considers the legal framework bogus, when the SEC is arguing they have not met the legal framework.

In a SAFT you sell securities for future non-securities. What Telegram did was sell securities for future securities. There's a couple of facts they use in this assertion:

1. Telegram said they would leverage their existing user base to promote the token (i.e. the success of Grams is based on Telegram's efforts as a promoter) 2. TON is PoS, and that its not possible to deliver a PoS network when the original stakers are all qualified investors

znpy• 7 years ago

Meh, it looks like the US wants to have a say in what people in other countries are doing, again.

ryanlol2• 7 years ago

This is about the US wanting to have a say in what those people do in the US.

octomatic• 7 years ago

https://cointelegraph.com/news/telegram-responds-to-investor...

SEC blocks the Telegram ICO – what this means, and what happens now

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