Opinion: The SEC’s Telegram smackdown is a good example of securities laws working as intended
Opinion: A lack of regulatory clarity is preventing insiders from dumping overpriced tokens on retail speculators.
The SEC has sued Telegram to prevent the distribution of TON tokens, which it describes as an "ongoing illegal offering of digital-asset securities called Grams," issuing a temporary restraining order to prevent further offerings.
"It appears... that defendants have obtained US$1.7 billion in proceeds from their unregistered offers and sales of securities known as "Grams," including $424.5 million from investors in the United States, and that Defendants are about to engage in additional unregistered offers and sales of Grams," the restraining order says.
Subsequently, Telegram complained in a letter to its investors that it had been trying to communicate with and get feedback from the SEC for 18 months.
"We were surprised and disappointed that the SEC chose to file the lawsuit under these circumstances, and we disagree with the SEC's legal position," Telegram said.
This turn of events has drawn out some criticisms of the SEC and arguments that a lack of regulatory clarity is inhibiting innovation in the space. It's also brought comparisons to the EOS settlement of a couple of weeks ago, where EOS paid a piddly $24 million settlement in a $4.1 billion unregistered token sale.
EOS also got to walk away with no operational consequences, while Telegram is now under the hammer in a way that could impede it from actually distributing tokens or operating its intended network.
However, the big difference is that Telegram actually tried to do the right thing legally speaking, while EOS took more of a "sell 'em all and let God sort them out" approach.
Doing the right thing, legally speaking
Telegram's efforts took several forms. It was technically selling SAFTs (simple agreements for future tokens), with the idea being that the SAFT itself is the security while the tokens themselves are not. It was also avoiding buybacks and promising various technical-type things to better ensure that the Telegram network would pass muster as a "decentralised" network to better avoid classification as a security.
Plus, as its token sale heated up, it ended its ICO early, specifically to avoid ticking off regulators too badly.
Basically, common crypto-legal wisdom at the time held that Telegram should have been legally okay. This is evidenced in part by the number of high-profile venture capital firms who took part in the sale. Now it looks like that common crypto-legal wisdom was off the mark.
As such, the SEC's smackdown of Telegram – even after it tried to do the right thing – is a big point for the argument that the SEC is inhibiting innovation in the crypto space by dragging its feet on crypto regulations and through its old-fashioned insistence that the Howey Test remain the standard for deciding whether a digital asset is a security.
Fine lines
There's a fine line between "innovation" and "making bank by pumping and dumping overhyped ICO tokens on the retail market". The $1.7 billion Telegram whitepaper suggests that Telegram is on the latter side of the line.
What's the Telegram project about?
The Telegram cryptocurrency is designed to be used as a currency on the Telegram messaging app, in much the same that emojis could start being a currency if you put a finite cap on how many could circulate on a messaging app at any given time.
With the power of its existing user base, this would eventually evolve into an open dapp network.
The Telegram token was going to be supported by its own high-scalability blockchain, built on a solid foundation of technobabble and features such as an "infinite sharding paradigm" and "instant hypercube routing".
It's not clear how exactly Telegram was going to do these things, but it can be speculated that Telegram was going to use the proceeds of its ICO to hire a team of people to hand-wave away problems.
With a sufficient amount of hand-waving, you get a really nice, eye-catching Mexican wave kind of effect. Then, while everyone's looking at that and saying "ooh" and "ahh", Telegram could substitute its infinite cosmic hypercubic shards for something much more mundane.
Sophisticated Telegram investors who got in early may have been primarily banking on profitably dumping the tokens on greater fools, rather than buying into the idea of some Telegram native cryptocurrency. In fact, there was definitely some of that going on as participants in earlier and cheaper ICO rounds dumped tokens on those in later rounds.
The point isn't to dig at Telegram. Rather, it's that you can't separate the quality of the Telegram project from these SEC rulings because the SEC's mission is to protect investors. Securities laws are a means to this end rather than divine wisdom passed down from on high.
Right now, there's a lot of talk about how securities laws need to evolve as evidenced by Telegram falling afoul of the SEC. But there's an equally good argument for the exact opposite. By preventing the Telegram tokens from hitting the market, you could say securities laws are working exactly as intended in the crypto age.
That said...
Of course, the SEC isn't in the business of picking winners and losers or deciding what does and doesn't constitute good technology. And at the same time, by restricting token sales to accredited investors, you inadvertently perpetuate the anti-main-street pump and dump rhythm, by ensuring that the richer insiders get the best prices while retail speculators eat last and get dumped on.
Plus, when you look at the way EOS skated through its unlicensed security sale without a care, how Blockstack paid millions in compliance costs on a relatively small token sale, and how Telegram tried to do things right (legally speaking) but is now getting the kibosh, it seems clear that it's easier to ask for forgiveness than permission.
But if you're the SEC and you see a bunch of retail speculators about to get hit with a train, you could do a lot worse than shove Telegram onto the train tracks.
Protecting investors is a complex, never-ending mission. In the end, the right balance might look like a combination of open ICO-style investments and grass-roots consumer education, where "investment" is literally a subject being taught in school.
But that's obviously a very long way off.
When considered as part of the broader crypto-regulatory space, the Telegram SEC smackdown is a troubling indication of just how far there is left to go. But when considered in isolation, it's hard to see it as anything except a victory for retail speculators who would otherwise have gotten burnt.
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Disclosure: The author holds BNB and BTC at the time of writing.
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