Telegram’s battle with the United States Securities and Exchange Commission became one of the most closely followed legal dramas of the crypto space in 2019. This was not only because it appeared to be the first time the Durov brothers’ relentless expansion faltered but also because the court case could have lasting implications for future fintech projects around the world.
Although an initial court decision seemed to have allowed Telegram to maneuver around the request by the SEC to provide the company’s banking records, that decision has since been reversed. Telegram, however, confirmed that it would comply and issue the records — although most likely in a redacted form — by Jan. 15, even though the deadline is in late February.
Aside from the impact that Telegram winning its legal case with the SEC could have on future approval for crypto-related projects in the United States, the battle between regulators and Telegram takes place against the backdrop of seismic changes within the industry. The catalyst for such rapid change took place in late 2019, when Facebook announced its ambitious stablecoin project, Libra. The shockwaves from Libra were felt immediately across the industry, with Bitcoin prices erupting from slumber and skyrocketing over $10,000 for the first time since 2017. Since then, Chinese President Xi Jinping made a landmark statement that championed the development of blockchain technology in the country.
The Chinese central bank’s digital currency initiative went into overdrive, which many saw as both an indication of the government’s softening stance toward cryptocurrencies as well as a glaring example of the potential implications of Facebook’s Libra on the monetary policy of sovereign states. For a short while, it looked like a frenzied scramble was taking place to take pole position in a rapidly developing sphere of influence not seen before in finance or politics. The Telegram Open Network, or TON, fueled by its own in-house cryptocurrency, Gram, aimed to be the very first token-backed product for mainstream use. Due in part to Facebook’s presence at the forefront of public consciousness and its billions of users, Libra’s launch appears to have flown too close to the sun. The Durov brothers had the lead — but not for long.
Telegram’s entrance into the cryptocurrency world began in earnest with a mammoth $1.7 billion sales round in February 2018. The crux of the SEC’s dispute with Telegram is how the company circumvented registering the sale of Gram tokens as a security with the regulator. On Feb. 17, 2018, the firm filed for what is known as Form D, an application that absolves companies of the need to register their securities with the SEC. At first, this route might sound like a “get out of jail free” card for ambitious companies looking to launch with minimal interference from hawkish regulators. In reality, Form D comes with its own set of restrictions.
Telegram filed under a 506(c), an exemption that permits companies to advertise and avoid SEC registration if securities are sold to accredited investors alone. Several months went by and it seemed as if Telegram had pulled it off. Investors eagerly awaited the Oct. 16 public token distribution. However, on Oct. 11, the SEC stopped the TON project in its tracks with an emergency action and a restraining order. The regulator claimed that no restrictions were put in place to prevent initial investors from reselling their newly acquired assets. For the SEC, this was a violation of the Form D route.
Despite the catastrophic timing, Telegram hit back at the SEC, disputing its findings and official position on the project’s initial round token sales. Investors sided with Telegram by foregoing their right to an initial refund afforded to them within the private purchase agreement as well as by supporting a delay in the issuance of the tokens.
Although Telegram’s hearing was rescheduled for mid-February, it appears that the bell for the next round of the regulatory battle has been rung early. The SEC’s attempt to find misconduct in the firm’s $1.7 billion token sale has seen the regulator wrestling with the firm over the publication of its bank records. According to a Jan. 13 filings with the District Court of the Southern District of New York, the firm has until Feb. 26 to hand over the bank records. A notable detail is that Telegram is allowed to redact the information given to the court according to foreign privacy legislation. Philip Moustakis, a former senior counsel at the SEC and attorney with Seward and Kissel, explained that the SEC will scour the documents for evidence of the company’s “failing to exercise reasonable care to ensure that the purchasers were not acting as underwriters.”
A letter to the court from Pavel Durov’s attorneys states that Telegram agreed to provide the SEC with these records no later than Jan. 15. Legal disputes of a financial nature often involve requests to provide bank records. What’s unusual in Telegram’s saga with the SEC is that the regulator’s initial request to see the documents had been denied. According to a Jan. 6 court order signed by Judge P. Kevin Caste, the New York court denied a request by the SEC to “compel the production of the defendant’s bank records.” At the time, former federal enforcement attorney with Kansas City-based Kennyhertz Perry LLC Braden Perry explained that the court’s decision to deny the SEC’s request for Telegram’s bank records was an extremely unusual occurrence and worth taking note of:
“What it signals is that the court agrees, at least at this time, with Telegram in that the SEC brought a non-fraud case against them within essence one legal question: Did the offering of the Gram constitute a ‘security’ under the Howey Test. This case does not involve any allegations of fraud or that Defendants misrepresented how they would use the funds raised. The court is denying the typical massive scope of SEC discovery, which ordinarily involves vast financial requests.“
While the court may have denied the SEC’s initial request for the bank records, Perry explained that such a decision does not shut off access to information for the rest of the legal case and that regulator will be able to make repeated requests to gain access to the details that it thinks are relevant to the legal proceedings:
“From a judicial standpoint, Telegram had previously provided information related to the TON platform and the SEC’s request was likely considered just too broad because the SEC was seeking every bank record from Telegram reflecting every single transfer or payment to or from Telegram during the time of the private placement up until now. The judge denied it without prejudice, meaning the SEC could request that information again later.”
The struggle for Telegram’s bank records aside, the firm also issued a series of summaries about TON on the same day as the court’s initial ruling. Known for its secrecy, Telegram noted that it would not comment or acknowledge rumors about its products:
“Telegram has been careful not to speak publicly about these rumors while we continue to build the TON Blockchain platform and work out the exact details of the project to ensure that the TON Blockchain and Grams can operate in a way that is compliant with all relevant laws and regulations.”
In light of how widely spread Telegram’s user base is around the world, a review of bank records to individuals and political parties would need to be tailored for each country to comply with privacy laws. Perry unpacked the developments in a conversation:
“One of the reasons [Telegram] did not want to produce bank records, which are located abroad and reflect payments to non-U.S. parties and individuals, Telegram would have to conduct an extensive review and redaction process to comply with foreign data privacy laws. Telegram argued that the process is time-consuming and expensive and ultimately unnecessary given the limited relevance of the information sought.”
Throughout its legal fracas with the SEC, Telegram has maintained that Gram tokens are not a tool for investment. On Jan. 6, the firm once again publicly stated that its currency should not be associated with profit-seeking initiatives and that it was not designed for long-term holding. This is particularly noteworthy in light of the company’s current circumstance as such a definition is usually applied to a security, a label the firm is trying to avoid being ascribed to its in-house token. Telegram maintained that Grams are designed to serve as a “medium of exchange” between users in the wider network, warning: “You should NOT expect any profits based on your purchase or holding of Grams, and Telegram makes no promises that you will make any profits.”
Despite Telegram CEO’s penchant for operating outside of the limelight — a behavioral pattern mirrored by the company he founded — Pavel Durov has reportedly given a deposition along with two other Telegram employees. According to a ruling by Judge Castel, the deposition should have taken place on either Jan. 7 or 8 in a location agreed upon by the two parties. For now, it seems that the information divulged by the Telegram CEO during the deposition is not going to be made public. Although yet unconfirmed, the court’s decision to overturn the denial of the SEC’s bank record request comes after Durov’s deposition was due to take place, implying that information given by the CEO could have led the court to change its mind. Although the fact that Durov was not set to give the deposition on U.S. soil has drawn attention. Perry said that such a development is not unheard of and shed light on the deposition procedure itself:
“Many cases, especially regulatory matters, involve overseas entities and parties this was a joint consent (agreed to by both parties) to allow the 30(b)(6) witnesses and Durov’s testimony to be held at a place convenient for the parties. This was likely negotiated stance where the Telegram would not object to the CEO’s testimony as long as it was at a place convenient for him. The deposition will not be in front of a judge but will be the parties to the matter and a court reporter. It is transcribed and can be used by the parties for several things, including discovery purposes and to tie down important information for a potential trial.”
Finnish Customs No Sure What To Do with 15M Euro Seized in Bitcoin
While some governments are selling bitcoins (BTC) confiscated through law enforcement actions, Finland is yet to decide what to do with its seized BTC. Finnish Customs, operating under the Ministry of Finance, has reportedly been deliberating about what to do with 1,666 bitcoins seized from drug criminals years ago. As reported by Finland’s national public broadcasting firm on Feb. 25, the Finnish Customs service doesn’t want to auction the confiscated Bitcoin because the cryptocurrency could be returned to the hands of criminals.
According to the report, at the time of the seizure the amount of confiscated Bitcoin was worth less than 700,000 euros, or roughly $760,000. As of press time, 1,666 BTC is worth nearly 15 million euros — or more than $15.5 million, according to data from Coin360. The authority was reportedly initially planning to auction the funds back in 2018, but eventually ended up with hodling the crypto, citing Anti-Money Laundering (AML) concerns. Pekka Pylkkänen, head of finance at the Finnish Customs service, said that cryptocurrencies like Bitcoin are primarily used for illicit practices:
“From our point of view, the problems are specifically related to the risk of money laundering. The buyers of cybercurrency rarely use them for normal endeavours.”
Apart from holding over $15 million in Bitcoin, Finnish Customs also holds a number of seized altcoins worth of millions of euros, the report notes.
Whatever the reason behind Finnish Customs’ decision to hodl the confiscated crypto, the authority is apparently not alone in thinking that Bitcoin and other cryptos might be more dangerous than cash in terms of money laundering. In July 2019, Treasury Secretary Steven Mnuchin voiced an extremely sceptical opinion of Bitcoin, arguing that cash is not laundered in the same way as Bitcoin. Meanwhile, other countries over the world do not appear so concerned about taking profits from hodling Bitcoin.
On Feb. 18, the United States Marshals Service sold another batch of Bitcoin confiscated during its enforcement operations. According to data compiled by well-known crypto industry figure Jameson Lopp, the U.S. Marshals has missed out on over $1.7 billion by selling seized Bitcoin too early. The agency has confiscated and sold 185,230 bitcoins, according to Lopp’s data.
‘I Think XRP Is a Scam’ Says Ben Askren Former UFC Star And Bitcoin Advocate
As regulatory concerns over XRP — the world’s third-biggest crypto asset — have intensified, some celebrities are stepping in to voice more FUD about the coin. Ben Askren, former UFC fighter and known Bitcoin (BTC) bull, has driven more scepticism toward XRP with a short tweet on Jan. 28: “I think XRP is a scam.”
Askren’s latest cryptocurrency verdict builds on a background of previous endorsements of other cryptocurrencies. The famous former Olympic wrestler is not only bullish on Bitcoin, but also supports Charlie Lee-founded Litecoin (LTC), the seventh biggest cryptocurrency by market cap as of press time. In January 2019, Askren was purportedly sponsored by the Litecoin Foundation as the mixed martial arts fighter for UFC 235 event. Subsequently, the UFC fighter appeared on his Instagram wearing a Litecoin-branded t-shirt. The celebrity has also promoted Bitcoin on his Twitter in October 2019:
“Just bought more BTC using @eToro was really easy, now all of you twitter geniuses can tell me Crypto is a scam while my assets go up!”
As Askren has been known as a shill for BTC and LTC for a while, a user on Twitter asked him a question: “The fact @Benaskren is staying quiet on XRP tells me its going to take it a long time if ever to moon.” Askren’s verdict didn’t take long, and a part of the crypto community on Twitter expressed some negative stance toward XRP, while the tweet has amassed over 2,000 likes as of press time.
Askren’s statement about XRP comes amid an already worsened situation around the coin as XRP dropped over 40% from $0.364 in 2019 to $0.183 in December, marking a two-year low. The situation has been exacerbated by rising concerns over the unclear regulatory status of XRP’s issuing company, Ripple, which faces a class-action lawsuit alleging that it held an unregistered sale of securities. Despite all this, CEO Brad Garlinghouse has recently hinted at an initial public offering for Ripple, which undoubtedly has some implications for the fate of altcoin. At press time, XRP is trading at $0.238, up over 1% over the past 24 hours, following a major green trend on crypto markets.
UK High Court Issues A Freeze on $1M of Bitcoin In A Ransomware Case
A United Kingdom High Court ordered a proprietary injunction on Bitcoin (BTC) obtained through a ransomware attack on a Canadian insurance company. A proprietary injunction is an order which prevents a person from dealing with their own assets when it is subject of a proprietary claim. On Jan. 17, the UK High Court released documents concerning a ransomware attack, in which over 1,000 computers of the insurance company were rendered unusable through the use of malware that encrypted files, making them unaccessible.
The unidentified attackers demanded $1.2 million in Bitcoin in exchange for decrypting the data. The firm’s insurer covered the client’s losses from cybercrime and agreed with the hackers to pay $950,000 in Bitcoin to decrypt the files, and received a tool to unlock them 24 hours after making the payment. Still, the company needed 10 days to restore all of its systems, including 20 servers and 1,000 desktop computers.
The company’s insurer hired blockchain major analytics firm Chainalysis to track the ransom. The analysis revealed that most of the Bitcoin, 96 BTC had been immediately laundered through crypto exchange Bitfinex. The court required Bitfinex to provide any information concerning the holder of the account that received the ransom by Dec. 18, 2019. Bitfinex did not clarify the status of the ransomers’ Bitcoin or what data was handed over to the court, stating:
“Bitfinex has robust systems in place to allow it to assist law enforcement authorities and litigants in cases such as this. In this case we have assisted the Claimant to trace the stolen Bitcoin and we understand the focus of the Claimant’s attention is no longer on the Bitfinex platform. It now appears Bitfinex is an entirely innocent party mixed up in this wrongdoing.”
According to a Jan. 25 report from New Money Review, the case is still ongoing. Darragh Connell, the insurance company’s legal representative, said, “Return hearings of the interim injunction will be heard again in due course before Mr Justice Bryan who has reserved the case to himself […] As this is only the interim stage, my client’s claim will need be determined after a trial in the Commercial Court in London.” Ransomware attacks are a major cybersecurity threat and are becoming increasingly advanced. Texas-based data center provider CyrusOne paid a $600,000 ransom in BTC in such an attack. In June 2019, hackers managed to infect the systems of the city council of Riviera Beach with ransomware and encrypt government files. Florida agreed to pay $600,000 worth of Bitcoin to the hackers.
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