The Blockchain Association, a blockchain advocacy group that comprises many of crypto’s richest and most powerful companies, on Friday once again rushed to Telegram’s defense.
The messaging app company is currently embroiled in a lawsuit from the SEC that alleges violations of US federal securities laws in connection with the firm’s billion-dollar ICO. The lobbyist group has now filed a second amicus brief supporting Telegram’s appeal against a temporary injunction for its upcoming blockchain network.
“The court has erred,” wrote the Blockchain Association, which argues that Judge P. Kevin Castel, of the New York Southern District Court, made a “wrong” decision when he appeared to side with the SEC by issuing a temporary injunction against Telegram toward the end of last month.
The case against Telegram, first filed by the US Securities and Exchange Commission in October 2019, concerns its $1.7 billion token sale for Telegram’s upcoming blockchain network, the Telegram Open Network.
The SEC argues that the sale of the tokens, called Grams, constituted an illegal unregistered securities sale. Telegram, which originally wanted to integrate the blockchain network into its eponymous 300 million-strong messenger app, argues it doesn’t.
But Castel said that the SEC “has shown a substantial likelihood of success in proving that Telegram’s present plan to distribute Grams is an offering of securities,” and prevented Telegram from distributing Grams, even to non-US investors. Telegram has appealed the decision.
The Blockchain Association’s filing to the court in support of its appeal lets everyone know that its members, which include Coinbase, Kraken, and Ripple, are on Telegram’s side. It is the second time the Blockchain Association has done so; in fact, much of the text is copied from its original amicus brief, filed back in January.
Once again, the advocacy group doubled down on the complicated argument put forward by Telegram’s lawyers: That the investment contract for Grams couldn’t constitute a securities sale because those Grams hadn’t even been minted yet, the group argued.
The investment contract was a so-called Simple Agreement for Future Tokens contract, or SAFT. In it, investors were simply buying the rights to future Grams, and Telegram had structured the network “so that post-launch Grams did not constitute securities” once they were minted into existence and delivered to investors, it argued.
The Blockchain Association claimed that Judge Castel “obscured that distinction by signaling that sales of post-launch Grams by SAFT investors would involve securities.”
“Nothing in the securities laws or precedent suggests that an issuer cannot enter into an investment contract with accredited investors[…] and deliver the resulting products to those accredited investors in satisfaction of those contracts,” it wrote.
The Blockchain Association then argued that SEC officials themselves have stated the need to draw distinctions. By failing to pay attention to the rules, “the Court has only added to the conflicting and confusing body of U.S. law with respect to digital assets,” the Association claimed.
Blockchain critic and author of “Attack of the 50 Foot Blockchain” David Gerard has followed the case closely and doesn’t think the argument has any weight. “The substance of the Blockchain Association’s brief is a claim that the SEC encouraged the SAFT model,” he said. But “they don’t show that the SEC said SAFTs were okay. Because the SEC didn’t say that, at all,” he told Decrypt.
“The Blockchain Association’s brief is frantic handwaving. I’d be surprised if the judge pays it much heed,” he said.
A modest proposal
For the exchanges, crypto funds and blockchain companies that comprise the Blockchain Association, the case is of immense importance. Castel, they argue, is about to make a decision that “prematurely rejected, or simply ignored, numerous ways of complying with US securities law.”
That has significance on the future of token sales bound by these special agreements—as well as coins that are listed on exchanges or invested in by crypto funds.
“The case is important because there are many, many SAFTs outstanding, and the Telegram case potentially generalizes to some of those other financial instruments that haven’t been scrutinized by regulators or had a day in court,” Nic Carter, partner of crypto VC fund Castle Island Ventures, told Decrypt.
Carter added that Castel’s acceptance of the SEC’s arguments so far “undermine the very premises of the SAFT.” And if Castel ultimately rules in favor of the SEC, “it will be much easier to challenge other SAFTs in the future in court,” he said. That could mean that tokens are taken off exchanges, investments disgorged, and companies responsible for illegal token sales heavily fined.
Castel said he will be mindful of an April 30 deadline—when Telegram might have to return the $1.7 billion to investors if the network doesn’t launch. With time running out, the argument put forward by the “friend of the court” may be far from amicable.