Posted on 05-08-2020.
Russian-born entrepreneur and programmer Pavel Durov, who is most famous for the creation of the encrypted chat app Telegram, has been under scrutiny of the United States financial regulators since 2019. That year, the U.S. Securities and Exchange Commission (SEC) turned its attention to Telegram and its wholly-owned subsidiary, TON Issuer. The regulator accused Telegram of conducting an unregistered initial token offering of Gram (GRM) tokens. Gram is a cryptocurrency based on the blockchain platform Telegram Open Network (TON) and is aimed at serving as the native digital currency for the in-app economy on Telegram for over 400 million users.
“Grams are securities because the Initial Purchasers and subsequent investors expect to profit from Telegram’s work: the development of a TON ‘ecosystem,’ integration with Messenger, and implementation of the new TON Blockchain. Grams are not a currency because, among other things, there are not any products or services that can be purchased with Grams.”As such, the SEC filed an emergency action and obtained a temporary restraining order against the companies until the dispute is resolved. Telegram disagreed and subsequently filed a notice of appeal. However, the court appears to be supportive of the financial regulator’s stance as it has ruled that Telegram can’t transfer the cryptocurrency to the investors, which basically means it can’t launch the TON platform, at this point. The tricky part is that the purchase agreement considers Telegram to owe investors a termination amount in the case Gram is not issued until the deadline date, which was April 30, 2019. Durov promised investors to repay 72%, or $1.2 billion, of their original investment. In its arguments, the court relied on the four-part Howey test created by the U.S. Supreme Court to determine whether an investment contract implies that the transaction is a type of security. According to the Howey test, an instrument can be considered a security if it is an investment of money, if it is an investment in a common enterprise, if an entity conducts a transaction with an expectation of profits, and if any profit is derived solely from the efforts of the promoters or third parties. The court made it clear it believes that the SEC will be able to prove that Gram tokens fall under the definitions set forth by Howey.
“In analyzing whether something is a security, ‘form should be disregarded for substance,’ ‘and the emphasis should be on economic realities underlying a transaction, and not on the name appended thereto’.”For Telegram, this apparently means that the court should discard the description of Gram tokens—including statements such as that it is a cryptocurrency—and evaluate Durov’s offering to investors in substance.
“The TON protocol represents an opportunity to create a massively scalable network benefiting hundreds of millions of people. Centered around smart contracts with easy to use tools for developers and users, it can promote free trade, equal opportunities, censorship resistance, and cooperation during an unprecedented threat from a pandemic and an economic crisis.”Despite the long-awaited launch and fuss around it, some industry players remain skeptical about TON without Durov’s direct involvement. As a co-founder of payment service provider Qiwi, Sergei Solonin, previously told ForkLog:
“I think it’s possible, but it won’t be as popular as if they [Telegram] launched it themselves. The strength of the brand and the personality, in this case, is one of the important factors.”In the reality where a group of independent developers took initiative and successfully launched the Free TON network with its own token, it remains to be seen whether Durov will continue fighting with the American regulator for his original idea or make concessions. Written by Ana Alexandre Follow us on Twitter and Facebook and join our Telegram channel to know what’s up with crypto and why it’s important.