Telegram, Kik and Tezos Cases Reach Milestones in Blockchain Token Litigation
By Teresa Goody Guillén and Robert A. Musiala Jr.
On May 24, the U.S. District Court for the Southern District of New York granted the Securities and Exchange Commission’s (SEC) motion for a preliminary injunction to prevent Telegram from delivering “Grams,” a new cryptocurrency, to the “Initial Purchasers.” The court found that the “Gram Purchase Agreements” and the anticipated distribution of Grams by the Initial Purchasers to the public via the TON Blockchain were part of a single scheme and applied the Howey test collectively to the contracts, expectations and understandings centered on the sales and distribution of the Grams. The parties did not dispute that there was an investment of money, and the court concluded that the SEC made a substantial showing of horizontal commonality and strict vertical commonality, that a reasonable Initial Purchaser would have purchased Grams with investment intent, and that a reasonable Initial Purchaser’s expectation of profits from the purchase of Grams was based upon the essential entrepreneurial and managerial efforts of Telegram. Accordingly, the court concluded that the SEC demonstrated that the sale and imminent delivery of Grams represent a single ongoing violation of Section 5 of the Securities Act of 1933, and that an injunction was appropriate to prevent the delivery of Grams to the Initial Purchasers, who would resell them on the public market in a public distribution of a security without a registration statement.
In another ongoing case involving an offering of blockchain tokens, SEC v. Kik Interactive Inc., late last week and early this week, the SEC and Kik filed cross motions for summary judgment. Kik’s motion argues that the Kin token is a currency, not a security, and that “[t]he SEC cannot establish the existence of a ‘common enterprise,’ an essential element of the Howey test.” The SEC’s motion argues that “Kik violated Section 5 of the Securities Act of 1933 … by conducting a public offering of securities – in the form of digital tokens called ‘Kin’ – without filing a registration statement or having an exemption from registration available.” Among other things, the SEC’s motion argues that “Kik conducted a single offering of Kin to accredited and non-accredited investors, which defeats reliance on Rule 506(c).”
In a third ongoing matter involving an initial coin offering (ICO), this week buyers of Tezos coins requested court approval of a $25 million cash settlement with the owners of the Tezos blockchain. The settlement would resolve a class action suit alleging securities fraud in the Tezos ICO, which the plaintiffs claim was an unregistered securities offering that illegally raised “the equivalent of $232 million in Bitcoin and Ethereum (at July 2017 prices).” According to a recently published report, funds raised from ICOs fell from $7.8 billion in 2018 to $371 million in 2019, representing a decrease of more than 95 percent.
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Stablecoins and Central Bank Digital Currencies Gain Attention
By Simone O. Otenaike
Earlier this week, a report from Coin Metrics revealed that stablecoins gained market share during the bitcoin crash two weeks ago. Such activity may suggest that cryptocurrency holders turned to stablecoins in an attempt to preserve their capital during the market crash. Also this week, the International Organization of Securities Commissions (IOSC) released a report on global stablecoin initiatives. The report notes that since stablecoins are often used for payments, such activity could rise to the level of regulated payment and banking activities and the stablecoin’s reserve funds and related interest could amount to securities products. The report also notes that if adopted on a large scale, stablecoin activity could be deemed a financial market infrastructure (FMI) and thus would be expected to comply with the relevant principles for FMIs. The report explores how current IOSC principles and standards would apply to a global stablecoin, and it concludes that the applicability of IOSC principles to stablecoins will depend on the specific design, features and relevant legal frameworks.
Last week, the Bank of England (the Bank) published a paper on central bank digital currency (CBDC). The paper reportedly defines CBDC as a digital version of a traditional bank note that can be used to carry out payment transactions and store value. According to the paper, the Bank’s proposed CBDC is fundamentally different from bitcoin because it will not be privately issued – the CBDC will be centrally issued by the Bank and will have the equivalent value of pound sterling. Also last week, the Congressional Research Service released an article that examines foreign central banks’ and the Federal Reserve’s approach to CBDCs and examines the related policy issues.
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CFTC Approves Guidelines for Delivery of Virtual Currencies, Web Browser Integrates Cryptocurrency Trading
By Jordan R. Silversmith
On Tuesday, the Commodity Futures Trading Commission (CFTC) announced its unanimous vote to approve final guidelines that clarify the CFTC’s stance regarding the “actual delivery” exception to Section 2(c)(2)(D) of the Commodity Exchange Act (CEA) in relation to virtual currencies. CEA section 2(c)(2)(D) makes certain “retail commodity transactions” subject to enumerated provisions of the CEA “as if” the transactions were futures contracts. The statute contains an exception for contracts of sale that result in actual delivery within 28 days from the date of the transaction. The CFTC’s new guidelines discuss two primary factors demonstrating actual delivery of retail commodity transactions in virtual currencies and aim to provide increased guidance in the rapidly developing fintech realm. The guidelines are timely; in spite of the recent tumult in the markets, physical delivery of bitcoin in Bakkt futures rose 44% in March. Bakkt’s bitcoin futures contracts, which first went live in September 2019, are the first of their kind to be physically settled in bitcoin. While physical delivery of bitcoin upon contract expiry increased, however, other metrics for Bakkt, like the volume of traded contracts and open interest, dropped significantly in March.
On Tuesday, two companies announced a partnership to bring cryptocurrency trading directly into Internet browsers. Brave Software, makers of the eponymous browser that integrates privacy with a blockchain-based advertising system, and Binance, the company behind the world’s largest cryptocurrency exchange, announced a partnership that will integrate Binance into the Brave browser and allow users to trade cryptocurrency assets directly through Binance.
In a final notable item, as bitcoin’s price has dropped, the mining difficulty rate on the Bitcoin Network has had the second-largest decline in its history. Bitcoin’s mining difficulty is programmed to adjust itself every 2,016 blocks, which usually takes around 14 days, in order to keep the average block production interval at around 10 minutes.
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