
SEC blocks the Telegram ICO – what this means, and what happens now - davidgerard
https://davidgerard.co.uk/blockchain/2019/10/13/sec-blocks-the-telegram-ico-what-this-means-and-what-happens-now/
======
schmichael
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...](https://www.sciencedirect.com/science/article/pii/S2214629619302701)

~~~
DaiPlusPlus
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.

~~~
woah
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.

------
JumpCrisscross
> _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.

~~~
snagglegaggle
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.

~~~
JumpCrisscross
> _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.

~~~
snagglegaggle
Resisting unjust legal action (initiated either by officer or judge) can
happen any number of ways, including telling the court to stuff it.

Plea deals are the overwhelming number of convictions in the US, something
like 90%. Most people do not have access to legal recourse and trusting any US
court to operate sanely is a bad idea. Best to avoid it if you can.

~~~
JumpCrisscross
> _Most people do not have access to legal recourse_

This is a red herring. Telegram have access to lawyers.

~~~
snagglegaggle
It's not. They have access to lawyers, but can they outspend the SEC or any
other agency that wishes to participate? One of the best predictors of whether
a lawsuit succeeds is money spent.

~~~
nl
Another good predictor of lawsuit success is what the law says, and in this
case it's pretty clear Telegram is in the wrong.

~~~
jki275
That's an essentially totally misinformed view of the law -- especially civil
law -- in the US.

It's all about how much money you can spend on lawyers and experts, not
whether you're right or not.

Hell, the government doesn't even know what the laws they write say, and they
rarely agree on what they mean.

~~~
nl
This just isn't true. Yes, if you have zero dollars it's bad news for you. But
if you have enough money to have decent lawyers then things even out, even if
the other person has much more money than you. Then what the law says is a big
deal!

See
[https://news.ycombinator.com/item?id=21245365](https://news.ycombinator.com/item?id=21245365)

~~~
jki275
Most people don't have hundreds of thousands of dollars to spend on lawyers.
My comment stands in the general case as a result.

~~~
nl
Telegram does though.

------
aey
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...](https://www.sec.gov/Archives/edgar/data/1729650/000095017218000060/xslFormDX01/primary_doc.xml)

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.

~~~
snagglegaggle
>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/](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.

~~~
aey
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.

------
aakilfernandes
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._

~~~
davidgerard
(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
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.

~~~
davidgerard
What I mean by "SAFT is dead" is that the purpose they were overwhelmingly
used for - which really was to try to sell token futures as a security, but
have the resulting tokens not be a security - is a non-starter.

Sure you can try to construct exceptions to this - but dodging the Howey test
was what SAFTs were invented for, and I feel reasonably confident in stating
that this complaint against Telegram makes it very clear that this just isn't
going to fly.

------
seibelj
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.

~~~
JumpCrisscross
> _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.

~~~
seibelj
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...

~~~
PeterisP
Telegram was implemented in Berlin and now is domiciled in UK; most of their
operations, money and people are fully within reach of the western judicial
system. While Durov comes from Russia, he is in exile and Telegram is
structured to keep their money and people out of the reach of the _Russian_
judicial system for various reasons.

Also, a big part of their target audience of Gram early holders is in USA, so
they also obviously care about the legality of these transactions. For them
it's not sufficient to have some technical workaround that enables them to
sell the tokens they have, they need a solution that allows them to do so
legally.

~~~
ryanlol
>Telegram was implemented in Berlin

Why are you spreading this lie? It’s very well known by now that Telegram was
primarily developed in St. Petersburg, in a building shared with VKontakte.

[https://twitter.com/bershidsky/status/910169626989953024](https://twitter.com/bershidsky/status/910169626989953024)

[https://twitter.com/ChristopherJM/status/910186197598838784](https://twitter.com/ChristopherJM/status/910186197598838784)

[https://theoutline.com/post/2348/what-isn-t-telegram-
saying-...](https://theoutline.com/post/2348/what-isn-t-telegram-saying-about-
its-connections-to-the-kremlin)

>While Durov comes from Russia, he is in exile

Durovs exile is very fleeting, normally you wouldn't visit the country you're
in exile from... [https://tjournal.ru/tech/52954-durov-back-in-
ussr](https://tjournal.ru/tech/52954-durov-back-in-ussr)
[https://lenta.ru/news/2017/03/20/durov/](https://lenta.ru/news/2017/03/20/durov/)

I should also add the obligatory note that Telegram has shipped _obvious_
backdoors in the past allowing them to selectively decrypt secret chats
[https://habr.com/en/post/206900/](https://habr.com/en/post/206900/)

lol @ the downvoting TON bagholders

------
mikece
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?

~~~
JumpCrisscross
> _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.

~~~
davidgerard
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...](https://blog.coinbase.com/coinbase-continues-to-explore-
support-for-new-digital-assets-70419575eac4)

------
dang
Recent related thread:
[https://news.ycombinator.com/item?id=21228415](https://news.ycombinator.com/item?id=21228415)

------
octomatic
[https://cointelegraph.com/news/telegram-responds-to-
investor...](https://cointelegraph.com/news/telegram-responds-to-investors-on-
sec-action-hearing-set-for-oct-24)

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

~~~
JumpCrisscross
> _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...](https://www.sec.gov/litigation/complaints/2019/comp-
pr2019-212.pdf)

------
jorvi
> 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
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.

~~~
jorvi
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

~~~
shakna
> Edit: to clear up the analogy - UK courts don't have a say over what
> Unilever can and can't sell in USA jurisdiction.

And the SEC is dealing with what is being sold in the US.

> committed to flood the U.S. capital markets with billions of Grams by
> October 31, 2019

> sold more than 1 billion Grams to 39 U.S. Purchasers, raising $424.5 million
> from the U.S. market

~~~
jorvi
And the article says

> This is worldwide — not just for the US

I even quoted that in my parent comment.

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

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

