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SEC Gets Win in Test of Authority to Regulate Cryptocurrency Sales (wsj.com)
91 points by JumpCrisscross 13 days ago | hide | past | web | favorite | 45 comments





This is pretty straightforward:

The Securities and Exchange Commission (“SEC”) seeks to enjoin Telegram Group Inc. and TON Issuer Inc. (collectively “Telegram”) from engaging in a plan to distribute “Grams,” a new cryptocurrency, in what it considers to be an unregistered offering of securities. In early 2018, Telegram received $1.7 billion from 175 sophisticated entities and high net-worth individuals in exchange for a promise to deliver 2.9 billion Grams. Telegram contends that the agreements to sell the 2.9 billion Grams are lawful private placements of securities covered by an exemption from the registration requirement. In Telegram’s view, only the agreements with the individual purchasers are securities. Currently, the Grams will not be delivered to these purchasers until the launch of Telegram’s new blockchain, the Telegram Open Network (“TON”)Blockchain. Telegram views the anticipated resales of Grams by the 175 purchasers into a secondary public market via the TON Blockchain as wholly-unrelated transactions and argues they would not be the offering of securities. The SEC sees things differently. The 175 initial purchasers are, in its view, “underwriters” who, unless Telegram is enjoined from providing them Grams, will soon engage in a distribution of Grams in the public market, whose participants would have been deprived of the information that a registration statement would reveal.

Telegram tried to split a security offering into two parts, neither of which, by itself, had all the components of a security offering. This did not fool anybody.

It's also a crap deal for buyers. If Telegram did an ordinary IPO, you'd get stock, a share in the profits of the company, and voting rights. "Grams" give you none of those things.

Attempts to frame a securities offering as something else are not new. The original Howey case, which defined the law in this area, involved a sale and lease back arrangement of Florida orange groves, with the rights to harvest the oranges being tradeable. Others have tried to pull this stunt with warehouse receipts, chinchillas, minks, diamonds, bullion, pay phones, and condos. The ICO crowd is not as original as it thinks it is.


> It's also a crap deal for buyers. If Telegram did an ordinary IPO, you'd get stock, a share in the profits of the company, and voting rights. "Grams" give you none of those things.

This is the part I never understood. Even if you could suspend disbelief over the regulatory risk of this whole thing, it still seemed like a fundamentally bad offering.


As usual, the article fails to link to the actual court ruling, even though they're usually perfectly readable without any preexisting legal knowledge. Here's a copy:

https://drop.qoid.us/453109383-TG-Order.pdf


this was obviously going to happen. how telegram could have imagined this going any other way is beyond me. i'm not even a lawyer and i could have told them this.

Well, maybe they should have hired you as their counsel then.

Unlike many of the SEC’s targets, Telegram had the advice of a Wall Street law firm before raising funds, while the investors in its digital-coin sale included the Silicon Valley venture-capital firm Kleiner Perkins Caufield & Byers, as well as executives from Fortress Investment Group and SoftBank Group Corp.


And we all know how great SoftBank is with due diligence.

Their lawyers were Skadden-Arps. They are not dumb.

The ultimate outcome of this is still TBD. It's entirely possible that Telegram will settle and be able to release their coin, it's a question of how much of the money they will have to disgorge and what penalties the SEC will impose to extract that settlement.

Telegram raised a TON of money, so I expect they will eventually get to a settlement. It's really just a question of what terms. Depending on those terms, their strategy was either a bad or good decision.


The entire crypto industry is offshore now. Coinbase is a shadow of itself, doing 1/20 of Binance on a good day. All US players are buried under mountains of legal fees while the offshore players continue to gain market share. The only rational move if you have a physical entity is to 1) Ban US customers and 2) incorporate in Cayman, Seychelles, etc. Coinbase talks about “maybe launching futures at 10x leverage” but that takes them millions in legal fees and years of effort to allow this. Meanwhile Binance and FTX have 150x leverage and launching crypto-derivatives on oil, DOW, FTSE, forex, etc. etc. etc. It’s game over for Coinbase, Gemini, all US guys. I don’t blame the US given their heavy regulation focus on financial markets, it’s what regulators in the US do, but it’s simply untenable for crypto industry given it’s a global market and the only restrictions to access are illusions mandated by governments.

Telegram made a mistake by taking any US money whatsoever. If they avoided that they would have had much easier time.

Blockchain doesn’t care about borders, it’s just math. US is playing a losing game but it’s fine - the software doesn’t care.


decentralized, permissionless blockchains don't care about borders.

centralized businesses absolutely do. Thinking that they can skirt securities law by saying "blah blah blockchain" is comically stupid. even calling centralized services "blockchain" misses the entire point of it in the first place. centralized icos are not decentralized, not censorship resistant and are not permissionless. the only reason they are doing it on a blockchain instead of a database is either because they are trying to avoid securities regulations or they are trying to sell a buzzword to suckers.

if you are centralized "blockchain" does not protect you from regulators coming in and bankrupting your company.


Regulation is good, not bad.

If you care about protecting people, indeed; along with fighting to counter regulatory capture by bad actors and industries being a necessary counterbalance vs. allowing a wild west scenario.

Better that people be able to choose between regulatory regimes, by choosing between different private platforms, than have a on-size-fits all regulation imposed on them without their consent.

You shouldn't have to leave the US to use a particular exchange.


Consent is given through voting rights. That's where the buck stops.

The majority voting for something doesn't equal consent.

It does, as by voting you relinquish your rights to have your opinion being taken into account by delegating it to representatives.

Which means you consent to the decisions of the majority.


Democratically enacted laws apply whether you cast a vote or not.

There is no contractual agreement that you surrender your agency when you decide to vote.


You don't surrender your agency, but your rights will be the ones determined by the country your are residing in.

Not casting a vote is a choice not to vote which is also a form of opinion.


You can have the opinion that majority vote establishes rights, although by that logic democratically enacted laws prohibiting homosexuality, abortion, etc are not immoral, but that doesn't support the claim that these types of laws are unanimously consensual.

Laws are imposed on people with or without their consent. At no point does a vote taking place confer that everyone consented.


Laws have no relation to ethics.

Some law are unethical some are not, even if they are voted by a (super) majority.

But by living in a country, you consent to the laws of the country applying to you. That's the social contract you sign by being a citizen or resident in a country.

Your choice is to not live in that country or vote to change the specific laws that bother you.


>>But by living in a country, you consent to the laws of the country applying to you

Then all laws are consensual, and thus it's impossible for a law to be unjust.

That goes for anti-gay, anti-abortion and racist laws.

Another way to look at it is that you have an inherent right to live in your own country, without having to meet any conditions others impose on you. Thus you can choose to live in your own country and not consent to all laws.


How would the SEC shutdown a Hong Kong exchange that excludes US customers? You don’t understand how jurisdiction works. Bitmex has been operating for 7 years!

you should look into btc-e, the russian exchange that was shut down by the united states government. not only was it a russian exchange, he was arrested in greece, neither of which are america, for those not keeping track at home.

i agree if the people of telegram want to never step foot on US soil and want to never step foot on the soil of a country that has extridition treaties with the united state, they can feel free to blatantly ignore united states law. good luck with that one. i doubt that will end well for you.


BTC-E is alleged to have committed crimes that would bring it/Vinnik under the jurisdiction of the United States. The US did not just waltz in to Greece and arrest a Russian national with no assertion of jurisdiction. It also appears that many other nations agreed that the US has jurisdiction to prosecute him...

https://www.justice.gov/usao-ndca/pr/russian-national-and-bi...


https://www.natlawreview.com/article/can-sec-bring-enforceme...

> When the conduct outside the United States had a substantial effect in the United States or upon United States citizens.

So, as long as you make sure not to affect the US or US citizens, you should be safe from the SEC. However, who knows how broadly this rule will be read. If you don't KYC, you could accidentally affect a US citizen, and I don't see an exception here for that case.

(I don't know if this applies to all SEC rules or just 77q(a), but it seems prudent to assume that if you are running afoul of an SEC rule you be very sure that no US citizen uses your services.)


The key feature of coinbase and gemini is of course that they are following all the regs and are the most trustworthy exchanges out there. The people who want 150x leverage on a shady exchange are not the same customers. I would fathom that they are not even in the 'crypto' space as the history of shady exchanges going belly up (btc-e, cryptsy, bitfinex?) should keep anyone with a half descent memory up at night.

Are you implying Binance is shady, and if so, what makes you think that?

I'd say Kraken is the most trustworthy exchange, and it's available in the US as well.

The market is proving that the demand for highly-regulated exchanges is far less than the offshore light-regulation ones. The volumes and liquidity speak for themselves.

This is not true; reported volumes are fraudulent or misleading for some of the exchanges you are describing. Look at the entropy of Binance daily volume compared to legitimate exchanges like Coinbase, Kraken, Gemini, etc. They used to be faking it even worse. Average real volume on legitimate exchanges has actually grown since the 2017 bubble.

And comparing real volume against the volume of synthetic instruments like Bitmex's perpetual swap is comparing apples to oranges. There is no fiat currency on those exchanges. There is literally zero real liquidity, simply the mechanics of liquidity that can only be cashed out on a reputable exchange.


For whatever reason my original account is rate limited. OTC desks execute trades on Binance / Bitfinex and hedge on Bitmex / Binance Futures. If Binance quotes you [XXX] BTC at $1 mil it will go through 100% of the time. You are out of your mind if you think they are faking vol. Perpetual futures charge the same bips if you go 100x, if you have 0.2% fee the exchange takes $2 at 1x or $200 at 100x, doesn't change the fees. Leverage inflates volumes but absolutely increases their fees (revenue), both from bips but also maintenance. You're on another planet if you think Gemini and Coinbase have anywhere close the revenue of Binance and Bitfinex. Sorry man.

> If Binance quotes you [XXX] BTC at $1 mil it will go through 100% of the time.

1mm would even go through on Gemini. Even for crypto, that's tiny. You bring up an important point: have you ever noticed the correlation between fees and volume? Bitmex is the best example; they literally pay the maker of each trade and the taker pays an order of magnitude less than KYC exchanges.

Bitmex and Binance are doing well, no doubt, and Bitmex likely has higher revenue than Coinbase's exchange and Kraken combined, in part due to their built in market maker and de-leveraging mechanism. However, the numbers you are looking at will throw you off by an order of magnitude from true values for the argument you are trying to make. The big legitimate exchanges are doing quite well considering the market, although the volume is seemingly consolidating into Coinbase and Kraken.

If you know how to code, check out the entropies. Bitmex volume is real, but synthetic. Binance volume... maybe 40% real, being generous. There was a time when it was more than 90% fake, like most of the exchanges on CoinMarketCap. They literally faked it until they made it. No need to get feisty about it, just fact checking.


Well...some of the regulations defeat some of the purposes of using btc. Like tying your identity to what should be a pseudonymous interaction.

Of course it is. If you want to use cryptocurrencies to, for instance, launder the proceeds of your ransomware, or an illegal securities offering, or not pay any taxes on your crypto-day-trading, you probably don't want to do so in a highly-regulated exchange that follows KYC.

Also known as, 'I don't care if I lose my privacy, because I have nothing to hide.'

I don’t see any derivatives on Dow or oil on binance or ftx yet.

But those things have been around before crypto anyway like the weekend dow : https://www.ig.com/en/indices/markets-indices/weekend-wall-s...

Cme just launched options on bitcoin futures. That could bring a lot of trading back to the us over night, once wsb can bet on those options.


As long as you as a user step foot in a jurisdiction that cares about a blockchain, you lose. The law doesn't care about your software.

Why anyone thought software and math was going to take precedence over nation state authority and power is bewildering. Insert the xkcd about rubber hose encryption here.


How does Binance still operate then? Don’t they break every law in the book?

I think binance doesn't allow US citizens on its platform. They avoid everything US

Separate from international Binance (https://www.binance.com/en), but there is Binance US (https://www.binance.us/en).

Not a tall enough poppy, seems to operate in a way Malta does't mind.

Clarification that they are not based in Malta from Changpeng Zhao (CEO of Binance): https://twitter.com/cz_binance/status/1230860647086338048

They aren’t based in Malta! They are the biggest player in the entire industry! Not a tall enough poppy? Did you just google who Binance is?

At one point they were. Their company was registered at Abacus Business Centre, Level 1 Dun Karm Street, B`kara Bypass Birkirkara, Malta

I don't see how this is game over for Coinbase, Gemini, or any other of the US exchanges. Even if international exchanges have higher volume, these US cryptocurrency exchanges likely are not going away.




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