This week Telegram announced that the Telegram Open Network (TON) project would be discontinued as the SEC’s winning of a preliminary injunction barred Telegram from launching TON or distributing its Gram tokens.
Pavel Durov, Founder of Telegram then explored general themes relating to US dominance of the global financial system “…the people outside the U.S.… are still dependent on the United States when it comes to finance and technology… The US can use its control over the dollar and the global financial system to shut down any bank or bank account in the world.” he wrote. Durov closed his post wishing luck, “to all those striving for decentralization, balance and equality in the world. You are fighting the right battle…This battle may well be the most important battle of our generation. We hope that you succeed where we have failed.”
But this argument isn’t about decentralization or equality or balance. It’s about regulation. It’s about responsibility and it’s about leadership.
In July 2017, the SEC issued the “DAO Report,” advising “those who would use . . . distributed ledger or blockchain-enabled means for capital raising, to take appropriate steps to ensure compliance with the U.S. federal securities laws.” Telegram ignored this and through its unregulated initial coin offering (ICO) in early 2018 raised $1.7 billion by selling 2.9 billion future Grams to 171 investors/underwriters — including 39 from the U.S.. These investors were to receive an allotment of Grams upon the launch of the TON Blockchain. The SEC subsequently charged Telegram with the unlawful sale and offer of securities. Telegram argued that its ICO was an exempt securities offering and the Gram itself is not a security.
In March 2020, the Southern District of New York ruled against Telegram granting a preliminary injunction to stop TON on the basis that the SEC had shown a substantial likelihood of success in proving its case. The SEC followed up and won emergency action to stop Telegram’s “ongoing illegal offering of digital-asset securities called “Grams.”” This ruling then led to the announcement abandoning the TON Blockhain project.
The SEC action is not at all unreasonable. It alleges that Telegram “have failed to provide investors with information business operations, financial condition, risk factors, and management that the securities laws require… Issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token…Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”
Our industry has created innovative financial products not just innovative technology. The top 100 coins have a current market capitalisation of USD256 Billion. With that size comes responsibility. PwC’s blockchain services welcomes visitors with this warning on their landing page, “Distributed ledger technology and digital tokens are rewiring commerce, but lack of trust may stall progress.” Our industry is years ahead of other markets and years ahead of its regulators. These regulators are bureaucrats, struggling to keep up with one of the most dynamic and innovative industries the modern world has seen. Lack of understanding breeds fear and mistrust. We can ignore that or we can take the responsibility to address this no matter how difficult. With a 400 million people-strong user base, the entire industry was excited about the prospect of a cryptocurrency that could potentially be met with immediate adoption. However, that will now not be the case because Telegram sought to fight the US Government rather than work with them.
The leaders of our industry, in this case Telegram’s founders, have a responsibility to lead industry development. They should not use our technological advantage to manipulate or bypass the law but to work within the law to take our industry forward. Our industry has great libertarian origins but we must temper them when dealing in financial products that benefit from protection built in for the investing public. The insurance industry complies. The derivatives markets comply. Most markets comply. Yet Telegram felt it was different and chose to fight rather than comply. Contrast the actions of Telegram’s management with those of Facebook working on the Libra project.
The first reports of the Libra surfaced in December 2018 and now 18 months later Facebook still sticks to the difficult task of working with regulators, governments, banks and stakeholders to pave the way for the Libra. It must be so difficult and I imagine Facebook would have loved to ignore governments and stakeholders and roll out the Libra quickly. But they know that this would be a false dawn which would ultimately destroy value. It wasn’t even an option for them. Instead they chose the difficult road. When it launches, the Libra precedent will spur an Apple token, then an Ali Baba token, a Google token, an Amazon token and others replicating and adapting Libra’s technology, regulation and financial structure. One day these tokens may consolidate to create a coin carrying a significant amount of daily global commerce. A global regulated decentralized cryptocurrency that reshapes the way commerce works. On that day, our industry will be 200 times larger than it is today.
With the creation of financial products comes a responsibility to comply with the laws that govern them, to help create new laws where old ones don’t apply – to work with regulators and governments to help them understand our industry. At HAYVN we do it every day with our regulators. It’s our responsibility to our stakeholders. Yet Telegram’s leaders failed us all. They could have pioneered a new way, blazing a trail by creating the first mass market US regulator approved Blockchain based token offering. With $1.7Billion in funds, they could have lobbied Congress. They could have raised media awareness globally. Established Blockchain associations across the world to bring regulators together. They could have worked with the SEC to clarify the Howey test and its application to our industry. Set a precedent for all token offerings going forward. They could have taken huge steps for our industry by showing the world that our industry is ready to be part of the global financial system. Instead they chose to fight the system and they lost. Now we must rely on Facebook to carry this cause.
Our industry is not the first to seek and raise money from public markets and we cannot operate as if we sit outside the law. Others have tried and failed and dragged their sector down with them. Enron tried it in the Energy industry back in 2001. What followed was the collapse of the energy derivative markets and the effects were felt industry wide for many years. ”For the last few years, analysts kept saying, ‘Why aren’t you more like Enron?’ ” …. Now they’re saying, ‘You’re exactly like Enron.’ There’s a perception of impropriety with every company in the energy sector.” I don’t want that for my industry or my business. At HAYVN we work hard to change mindsets and to increase the acceptance of the cryptocurrency industry amongst traditional financial market participants. The leaders of Telegram should have done better, making our job easier not harder. We should demand better.
Christopher Flinos is the CEO of HAYVN, an online OTC trading platform purpose built for Institutional and large volume cryptocurrency trading and custody. Learn more at www.hayvnglobal.com