The Blockchain Association and the Chamber of Digital Commerce, two Washington, D.C. based-advocacy groups focused on blockchain and digital assets, filed amicus briefs Tuesday in the U.S. Securities and Exchange Commission’s case against messaging app Telegram.
An amicus curiae is someone who is not a party to a case, but who assists a court by offering expertise on the issues at hand. Generally, they submit their information in the form of a brief.
The two briefs, both around 20 pages, took different approaches. While the Blockchain Association directly opposed the SEC’s efforts to block the launch of Telegram’s network, the Chamber of Digital Commerce didn’t pick a side. It simply urged the SEC to draw a clear line between investment contracts and digital assets—the broader issue in the case at hand.
Telegram, a popular encrypted messaging service, raised $1.7 billion in an initial coin offering in 2018 by preselling its gram tokens to wealthy investors. Telegram claimed the offering was exempt from securities registration rules under Regulation D 506(c). It’s plan was to allow its investors to resell those tokens to the public on Oct. 31, when its Telegram Open Network was originally supposed to go live. The SEC got the court to temporarily block the launch.
On the flip side, the SEC alleges that Telegram ran a scheme wherein rich investors would get tokens at a steep discount, then dump them on cryptocurrency exchanges to bilk retail buyers. It argues that the tokens are securities under the Howey test—a test created by the Supreme Court for determining whether certain transactions qualify as investment contracts—and it is moving to permanently block the launch of the TON blockchain.
In its amicus brief, the Blockchain Association focuses narrowly on the Telegram case. The group brings up several arguments that have been used repeatedly in the past by the cryptocurrency industry, with little to no success. Namely, the nonprofit claims that the Telegram ICO was lawful, and that a court ruling in favor of the SEC will make it difficult for blockchain companies to legitimately use Reg D offerings going forward.
Specifically, the group said the lawsuit “raises novel questions regarding whether companies are forbidden from raising funds from sophisticated U.S. investors, under well-established regulatory provisions, to build blockchain networks.”
The group also argues that before Telegram launched its ICO, the SEC provided no clear rules regarding whether and when digital assets are securities.
It went on to warn the judge that a ruling against Telegram will put a damper on innovation in the space going forward. “Left unchecked, the SEC’s policy of ‘regulation by enforcement’ could stifle innovation and investment in this important new technology area,” the group said.
Finally, the Blockchain Association argues that the initial investors—those who stand to make millions from Telegram’s ICO—will themselves be hurt.
The court “should not block a long-planned, highly anticipated product launch by interfering with a contract between sophisticated private parties,” the group said. Doing so, it said, “would needlessly harm the investors that securities laws were designed to protect.”
Chamber of Commerce
The Chamber of Commerce brief was written by Lilya Tessler, the New York head of the fintech and blockchain group at Sidley Austin law firm.
The Chamber’s core argument is the same as Telegram’s, but its focus is broader than the one case. The nonprofit claims that once grams tokens are issued, they will become utility tokens. Therefore, they won’t be subject to securities laws. Tessler urges the court to come up with a better definition of a digital asset.
“Without a clear legal distinction between a transaction determined to be an investment contract and the digital asset that is the subject of the investment contract, these software developers, retailers, healthcare providers, advertising companies, and others may not be able to develop or use blockchain technology without unintentionally triggering the U.S. federal securities laws every time a digital asset is used as part of their network,” the brief said.
While the Howey test is open to interpretation, the U.S. securities laws have been around for more than eight decades. Prior to Telegram launching its ICO, the SEC’s Munchee order in December 2017 made it clear that calling a token a “utility token” does not unmake it a security. In other words, Telegram had plenty of warning.
The first court hearing in the SEC v. Telegram case is scheduled for February 18 and 19 to consider the SEC’s request for a preliminary injunction preventing grams from being delivered to investors.