SEC wins injunction against Telegram blockchain launch in key ICO case

(Reuters) – Ruling in a landmark digital currency suit by the Securities and Exchange Commission, U.S. District Judge Kevin Castel of Manhattan issued (2020 WL 1430035) a preliminary injunction Tuesday, barring the launch of the Telegram Open Network blockchain. The judge held that based on the particular facts surrounding Telegram’s plan to distribute a new digital currency to trade on its TON platform, the SEC was likely to succeed in proving that the blockchain’s developers engaged in the sale of unregistered securities.

The judge did not provide a clear answer to the key question of whether new digital currencies are themselves securities. But it seems to me that his analysis will make it difficult for blockchain developers to use the promise of cryptocurrency to raise money from U.S. investors.

Telegram has already filed a notice of appeal to the 2nd U.S. Circuit Court of Appeals. Telegram counsel Alex Drylewski of Skadden Arps Slate Meagher & Flom declined to provide a statement on Judge Castel’s decision. The SEC did not respond to a request for comment.

The Telegram blockchain’s developers – two brothers who founded the widely used encrypted messaging app Telegram – raised $1.7 billion in two private offerings to institutional investors in 2018. In return, the developers promised that investors would receive 2.9 billion “Grams,” a new digital currency that was slated to begin to circulate when the TON blockchain launched. The developers spent $405 million, according to Judge Castel, to develop the new open-source blockchain, which they said would be faster and more efficient than the Bitcoin and Ethereum platforms.

But last October, with the platform’s launch imminent, the SEC sued to shut it down. The commission argued that under the definition laid out in the U.S. Supreme Court’s 1946 ruling in SEC v. Howey (66 S.Ct. 1100), Grams were securities that could not be traded without registration at the SEC.

In the expedited litigation…

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