The Association of German Banks released a paper in which it says that the economy needs the digital euro.
German banks have presented a position paper in which they make several arguments for the digital euro.
On Oct. 30, in a paper released by the Association of German Banks (Bankenverband), which represents more than 200 private commercial banks and eleven member associations, banks stated that the “economy needs a programmable digital euro.”
Monetary policy is the state’s responsibility, says Bankenverband
The paper states that the responsibility for the monetary system lies with sovereign nation-states and that any currency provided by banks or private companies must fit into a state-determined system. “Anything else would ultimately lead to chaos and instability,” the paper reads.
The banks make the case for a cryptography-based digital euro which, they state, should be created on the condition that a concurrent, common, pan-European payments platform is also established, further adding:
“The user of a digital euro – whether man or machine – must be clearly identifiable. This requires a European or, better still, a global identity standard. With every form of digital money, customers should be identified using a standard that is just as strict as that which banks and other obligated entities are required to apply under current legal framework pursuing the combat against money laundering and terrorist financing.”
However, according to Bankenverband, a competitive payment system can only be based on a common standard and a common currency. It stated, “In order to maintain Europe’s competitiveness, satisfy customers’ needs and reduce transaction costs, the introduction of euro-based, programmable digital money should be considered.”
Although the private German banks are convinced that, in a digitized economy, this form of digital money will rapidly gain in importance, they state that the existing monetary system must not “be endangered by the provision of crypto-based digital money.”
A private global digital currency, such as Facebook’s Libra, competing with the official key currencies in the world economy would most likely be a source of considerable economic and political conflict, the paper adds.
The banks further call on national and international policymakers to act responsibly and assure that competition with private currencies should not be allowed.
While a digital euro seems appealing, German officials criticize crypto
The German finance minister Olaf Scholz echoed similar sentiments when he recently advocated for the idea of launching a digital euro coin, stating that such a digital payment system would be beneficial for Europe and that they “should not leave the field to China, Russia, the U.S. or any private providers.
Mario Draghi, president of the European Central Bank, recently said that private stablecoins and cryptocurrency in general are of little value, adding:
“Thus far, stablecoins and crypto-assets have had limited implications in these areas and are not designed in ways that make them suitable substitutes for money.”
The president of the European Central Bank is joined in his sentiments by the German federal parliament, which recently released a statement in which they said that cryptocurrencies such as Bitcoin (BTC) are not real money.
Moreover, the statement points out that stablecoins are no alternative to fiat money and explains that the government intends to limit their adoption:
“It will be ensured that stablecoins do not establish themselves as an alternative to state currencies and thus call into question the existing monetary system.”
A partnership with Cashlink simplifies the process via which investors pump cash into startups, using distributed ledger technology or DLT.
The venture capital arm of German marketplace Deutsche Börse has sealed a new partnership for allowing institutional investors to obtain digital securities.
Deutsche Börse pushes regulated digital securities
In a press release on Oct. 30, Deutsche Börse Venture Network (DBVN) confirmed the deal with local fintech company Cashlink, the benefits of which will be available immediately.
From now on, investors with DBVN will be able to complete the funding process entirely digitally using tools based on so-called distributed ledger technology, or DLT.
The digital securities will automatically have the same regulation guarantee as Deutsche Börse’s regular offerings.
“With this new offering from our partner, we are able to simplify the process of raising capital for startups on our network, and all within an existing regulatory framework,” DBVN director Peter Fricke commented in the press release.
Fricke added the company would be depending on its working relationship with Cashlink, which has operated out of Frankfurt since 2016.
Germany continues blockchain innovation
Last week, Deutsche Börse completed a trial of tokenized securities settlement with German banking institution Commerzbank.
“Digital securities are used for various purposes, for example as an alternative to regular venture financing, as digital employee shares ownership, as a digital representation of venture funds or for funding for non-European investors,” Michael Duttlinger, CEO of Cashlink, added.
A German startup is reportedly aiming to list a Bitcoin exchange-traded note on the Frankfurt and Luxembourg stock exchanges by December.
A German startup is attempting to list a Bitcoin (BTC) derivative product on the Frankfurt and Luxembourg stock exchanges.
According to German business news daily Handelsblatt on Oct. 29, the startup Iconic has filed a prospectus for regulated trading of a Bitcoin exchange-traded note (ETN), which could become available as soon as the beginning of December 2019.
Iconic said that it will issue an ETN that will offer investors exposure to the seminal cryptocurrency on a regulated marketplace. The ETN will also be issued its own International Securities Identification Number.
Handelsblatt states that, while Iconic is based in Frankfurt, the ETN will be regulated by Luxembourg’s finance watchdog, the Luxembourg Financial Supervisory Authority.
The startup will directly invest collected funds into Bitcoin, which will be purchased by major United States-based cryptocurrency exchange Coinbase. While Coinbase is headquartered in the U.S., it has expanded rapidly into other jurisdictions, including Europe, over the last year.
ETNs are seen as a gateway for crypto ETFs
ETNs are considered by some to be a “soft” version of another financial product, the exchange-traded fund (ETF). While an ETF is a security that tracks an index of funds, a commodity or a basket of assets, ETNs are backed by its issuers.
The eventual introduction of a cryptocurrency ETF is often regarded as a signal that the market has matured, as it will offer major institutional investors exposure to crypto assets. Investors have met crypto ETNs with less enthusiasm than a possible ETF.
Some experts see Bitcoin ETNs as a vanguard for other financial products involving the asset. The head of the Blockchain Center of the Frankfurt School of Finance and Management Philip Sandner said:
“Iconic has convinced both regulators and Deutsche Börse. The listing of their Bitcoin product on the Frankfurt Stock Exchange is a remarkable step […] A true Bitcoin ETF Europe is thus a significant step closer.”
Regulators, meanwhile, are skeptical of both crypto ETNs and ETFs. Earlier this month, the U.S. Securities and Exchange Commission rejected an application by Bitwise to list a Bitcoin ETF on NYSE Arca.
In the United Kingdom, the Financial Conduct Authority is mulling a ban on cryptocurrency ETNs. Coinshares, a British public exchange, recently published a letter on its website, urging its customers to fight the proposed ban.
Cryptocurrencies like Bitcoin are not real money, according to a statement published by the German federal parliament.
Cryptocurrencies such as Bitcoin (BTC) are not real money, according to a statement published by the German federal parliament on Oct. 28.
Not a payment vehicle, not a store of value
Per the announcement, the assets offered by the current cryptocurrency landscape — such as Bitcoin — provide only a very limited portion of the features expected of traditional money. The statement – titled “Crypto tokens are not real money” – is based on an answer provided by the German federal government to a question from the Free Democratic Party parliamentary group.
The answer provided defines the basic features of money as the following: exchange and means of payment, store of value and unit of account. The announcement points out that the volume of payments carried out using crypto is limited when compared to fiat currencies.
Stablecoins are not an alternative to fiat money
Moreover, the author of the statement also claims that the fluctuations reported by the value render crypto-tokens unsuitable to be a store of value. The answer provided by the government states that stablecoins attempt to solve the issues caused by excessive price fluctuations. Still, the government explains that it intends to forbid their adoption:
“It will be ensured that stablecoins do not establish themselves as an alternative to state currencies and thus call into question the existing monetary system.”
Lastly, the government also noted that they had yet to determine whether Facebook’s Libra would be compliant with German law. The white paper of the project is not an appropriate source of information to judge the matter and more information is needed, the statement reads.
Cointelegraph auf Deutsch presents a weekly digest of selected cryptocurrency and blockchain-related developments from the German-speaking world.
The German-speaking world has seen an array of crypto and blockchain-related developments over the past week, with the Federal Ministry of Finance concluding that cryptocurrencies are hardly involved in money laundering and terrorist financing (TF), Bitwala integrating a feature for automatically generating cryptocurrency tax reports, and the Graz startup Lab10 Collective developing a more energy-efficient blockchain.
Risk analysis by the Federal Ministry of Finance: Crypto is hardly involved in money laundering and terrorist financing
Under the auspices of the Federal Ministry of Finance, 35 authorities from the federal and state governments took part in the first national risk analysis in the area of combating money laundering and terrorism financing, which was initially launched in December.
According to the analysis, the use of crypto assets in such illicit financing is currently low. There is more evidence that crypto assets play a role the fields of right-wing extremism and Islamism. However, there is no reliable evidence that cryptocurrencies have been used to a greater extent in financing terrorism.
Crypto banking firm Bitwala began providing automatic tax reporting for cryptocurrencies
Bitwala integrated a feature that enables customers to automatically create standardized tax reports. In Germany and Switzerland, country-specific tax reports “comply with all legal requirements”. The CryptoTax solution also makes it possible to create “customized reports that can either be processed by a tax accountant or routed directly to the tax authority.”
1000 times more energy-efficient than Ethereum: Austrian startup presents a climate-friendly blockchain
The solution was developed by the Graz startup Lab10 Collective and represents a fully Ethereum-compatible platform for smart contracts. The company thus aims to fight against climate change. Lab10 Collective Board Member Thomas Zeinzinger commented on the product:
“For the past three years, we have been working intensively on how decentralized Internet technologies can contribute to greater sustainability and fairness in the economy. Climate change and the associated need for decarbonisation are an urgent challenge that we now radically address. “
Crypto-crime around Envion: Procuratorate searches office premises by former CEO Woestmann
The public prosecutor’s office in Berlin initiated a search of the business premises of the insolvent crypto startup Envion CEO Matthias Woestmann and his lawyer. Former Envion CEO Matthias Woestmann lodged a second complaint against a judgment he had previously made, stating that he had unlawfully secured control of the company through a capital increase.
Following the court ruling, the founders of the Swiss crypto startup in liquidation had announced that they would return the remaining cash to the participants of their initial coin offerings.
IOTA and Fiware partner to launch smart solutions
The open source platform Fiware entered partnership with IOTA to use Tangle technology for smart solutions. Specifically, Fiware intends to deploy Tangle for the decentralized storage of data on devices.
Juanjo Hierro, CTO of the Fiware Foundation, pointed out that context data could be reviewed and shared with third parties, while the planned development will ensure the quality of the data stored in a ledger. This is purportedly especially important in applications such as quality management in food production and supervision of certain parameters of animal welfare on farms.
All eyes are on the German economy which was once perceived as stable and strong. However, the financial state of affairs has been tumultuous and Berlin’s state cabinet recently agreed to a five-year rent freeze to help curb the rising housing costs in the country. Moreover, Bundesbank just published a monthly report that explains how Germany’s economic output is in a deep slump and the country’s monetary system has been beaten by Brexit fears and trade wars.
Many European nations have been focused on the Federal Republic of Germany and its economy. Economists and bankers from the region have been warning that the outlook is looking dreary for the rest of the year and into 2020. According to Germany’s central bank, the German economy has already fallen into the start of a recession. Bundesbank’s monthly report said the “German economic output could have decreased slightly in the third quarter of 2019,” and emphasized that it deflated by 0.1%. The eroding nature of the decline was “mainly due to the fact that the export-oriented industry continued to weaken,” Bundesbank said. The news follows all the warning signs that the next big financial crisis begins in Germany after the greater European Union saw a massive reduction in production. Bundesbank’s recently published report highlights that auto industry revenue in Germany dropped 1.5% between Q2 and Q3.
Now the leftist coalition within Berlin’s government has decided to agree to a five-year rent freeze. Reports claim that the three parties in Germany, the Greens, Social Democrats, and Die Linke, all believe a rent freeze is needed to battle housing costs that have spiked considerably in recent months. So much so that renters have called the rent inflation “rent madness” as rates have risen by 2.8% annually for close to two decades. The rent freeze plan was designed and promoted by the coalition of politicians including Katrin Lompscher of Die Linke. A rent freeze basically entails creating a price ceiling throughout the region and no increases in rent are allowed until the expiry date. Rent price controls are an extremely controversial practice and historically Keynesian economists have pushed the idea for decades. Germany has a long history of rent controls and started a system of “second-generation rent controls” in 1989 and again in 2015. The legislation known as the “Mietpreisbremse” or “rent brake” was supposed to stop rising rents.
A Rebirth of Communist Ideals
A few weeks ago, Leonid Bershidsky said the new rent control plan floating around the coalition of German bureaucrats was a case of “communist amnesia.” Bershidsky asserts that Germany’s capital city regulations “would greatly empower bureaucrats and boost a black market in housing.” Germany’s new rent freeze will ban increases for a five-year period except on housing that is already receiving subsidization and new construction homes. In order to make sure landlords are following procedure, tenants must have the city sign any new rent contracts. Berlin landlords are not too pleased with the socialist government stepping in on rent control and German economists believe landlords will skip much-needed renovation plans. For instance, because landlords won’t be able to raise the rent, most will likely choose to skip improving the property until the rent freeze ends. Moreover, by the end of the expiry date, people think that the rental prices will spike considerably by reflecting actual supply and demand.
Germany’s economy has been an integral part of the EU as a whole and the Eurozone. Watching the German economy can provide a telltale sign that something is wrong and signals from European central banks support this. In the U.S., the doom and gloom economic forecast is the same, where Trump’s trade war has been affecting markets and the Federal Reserve has been participating in overnight repos and slashing interest rates. Extreme economic concepts are now on the table as global financiers are discussing helicopter money, rent control, and basic income. A few analysts believe the warning signals this year have bolstered safe haven assets like precious metals and cryptocurrencies. The start of a slowing German economy a decade after the 2008 crash is a sure sign to some that a financial crisis is looming. Some even believe the days of rotten bureaucrats, filthy fiat, and ‘too big too fail’ central planners are numbered and a new era of financial freedom is upon us.
What do you think about Berlin’s government agreeing on a five-year rent freeze? Do you think cryptocurrency can help? Let us know what you think about this subject in the comments section below.
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The German Federal Ministry of Finance has expressed concerns about using privacy tokens due to their association with criminal activities and difficulties to track them down.
The German Federal Ministry of Finance has expressed concerns about rising use of privacy tokens due to their association with criminal activities and difficulties in tracking them.
Published on Oct. 19, the ministry’s “First Money Laundering and Terrorist Financing National Risk Assessment” for 2018-2019 provided analysis aimed at the identification of existing and future risks in the field of anti-money laundering (AML) and terrorism financing (TF) in Germany. Among other challenges, the report examines circulation of cryptocurrencies in the darknet for criminal purposes.
Pseudo-anonymous vs. anonymous tokens
The report marks a distinction between pseudo-anonymous and anonymous tokens, noting that pseudonymity allows the analysis of transactions in public blockchains and the evaluation of suspicious movements, while fully anonymous tokens like Monero (XMR) and Zcash (ZEC) enable transactions to remain untraceable and are thus vulnerable to involvement in illegal activities.
In this regard, the Ministry urges oversight of anonymous cryptocurrencies in the future. Although the market capitalization of such coins is still relatively low, the report notes, they are gaining popularity and acceptance in the darknet and eventually may become a real alternative to Bitcoin (BTC).
Risks associated with stablecoins and cash
According to the report, use of crypto assets in TF is currently low. There is evidence of use of crypto assets in the fields of right-wing extremism and Islamism, however, there is no reliable evidence that cryptocurrencies have been used to a greater extent for TF.
Cryptocurrency volatility reportedly prevents its usage as a means of payment to some extent. However, stablecoins — which are pegged to an asset or fiat currency — can ensure stability of value, and thus could lead to an increase in laundering and TF risks, per the report. The report further reads:
“The use of cash, in contrast to the use of pseudonymous crypto assets, leaves no traceable footprint and is easy to handle, so it can be assumed that, for example, the transfer of funds in the field of terrorism financing alongside hawala and money transfer service providers currently continues mainly via cash couriers.”
On Oct. 21, the United States Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco said that fintech firms offering cryptocurrency users anonymity must comply with AML laws “just like everyone else.”
Cointelegraph presents a weekly digest of news from the German-speaking world, with help from Cointelegraph auf Deutsch.
The German-speaking world has seen another week of events in the crypto industry, with a new survey revealing that 27% of Germans are interested in using Facebook’s planned Libra stablecoin, which has been discussed all over the world since its announcement in June 2019. Despite existing criticism of Libra, global regulators do not plan to ban either Facebook’s crypto initiative or other stablecoin projects, the European Central Bank (ECB) director claimed earlier this week.
Lykke launches utility token to bet against crypto markets
As reported by Cointelegraph auf Deutsch on Oct. 14, Swiss blockchain startup Lykke recently launched a new token designed to track the performance of the top 25 cryptocurrencies by market cap as well as to put bets on falling prices in the crypto market. Dubbed Short LyCI, the new Lykke’s utility token reportedly includes 73% of Bitcoin (BTC), 9.6% of Ether (ETH) and 5.9% of XRP.
Lykke founder Richard Olsen, who is also a co-founder of private financial services firm Oanda, noted that Short LyCI is a simple investment product to manage risks and hedge exposure during downturns on crypto markets.
Ormera, new platform for electricity billing
On Oct. 14, Swiss companies PostFinance and Energie Wasser Bern (EWB) announced the launch of Ormera, a new startup providing a tool for measuring and automatic billing of self-generated electricity. Based on blockchain technology, Ormera’s platform intends to cut administrative costs by supporting effective use of energy generated in decentralized production, EWB said in the announcement.
Combining internet-of-things and blockchain components, Ormera targets energy supply companies, energy and real estate service providers and property management firms, the report notes.
Bauwens invests in Germany’s first provider of real estate tokens
German real estate giant Bauwens invested in the Foundation Group, which is known as the first-ever provider of real estate-based security token offerings regulated by major German financial authority, the Federal Financial Supervisory Authority (BaFin). As reported by Cointelegraph auf Deutsch, Bauwens intends to expand its expertise in the new business field of digitizing real estate investments by investing in the Foundation Group.
Bundesbank board member: stablecoins underpin the importance of central banks
As reported on Oct. 16, a board member of the German Bundesbank recently declared that the emergence of stablecoins — cryptocurrencies pegged to fiat currencies to provide a stable value — underpins the importance of central banks. In a speech on Oct. 8 in South Africa, Burkhard Balz claimed that stablecoins benefit from a kind of indirect stability, which could be interpreted as a complement to the successful and stability-oriented monetary policy by central banks.
On Oct. 18, Cointelegraph reported on a new survey showing that 27% of German people are planning to use Facebook’s planned cryptocurrency Libra. Powered by French online survey firm Toluna, the survey shows 73% of German residents have completely rejected Libra, with 42% saying that they do not trust Facebook, while 31% of respondents noted that they only believe in centralized currencies.
Also on Thursday, BaFin’s president Felix Hufeld expressed concerns over Libra, claiming that Facebook’s planned cryptocurrency sees a number of unresolved questions and represents a parallel currency created privately.
Despite existing concerns, global financial regulators are not planning to ban either Facebook’s Libra or other stablecoins, ECB director Benoit Coeure said in an interview on Oct. 17. However, Coeure stressed that such initiatives will have to meet high regulatory standards prescribed by the ECB.
German Federal Minister of Finance Olaf Scholz has doubled down on his previous statement that policymakers should prevent the issuance of Libra.
German Federal Minister of Finance Olaf Scholz has doubled down on his previous statement that policymakers should prevent the issuance of Facebook’s Libra stablecoin.
At the International Monetary Fund and World Bank fall meeting on Friday, Scholz stressed that stablecoins could pose international risks, Reuters reported on Oct. 18. Scholz expressed his utter skepticism regarding the social media giant’s plans, stating:
“We will carefully monitor the situation with all the means at our disposal. I am not in favour of the successful creation of such a world currency because that is the responsibility of democratic states.”
Scholz notes that the financial system needs reform
Scholz said that the existing financial system needs reform to improve and streamline cross-border payments, but without threatening the autonomy of states.
Scholz thus reiterated his mid-September statement when he urged policymakers not to accept parallel currencies such as the Libra stablecoin. “The Federal Government will work at European and international level to ensure that stablecoins will not become an alternative to official currencies,” a document seen by Reuters read at the time.
The number of regulators against Libra grows
At its latest meeting, a G-7 task force confirmed that the group of the seven wealthiest nations would not allow any global stablecoin to launch without adequately addressing the related challenges and risks. Once stablecoins are launched globally, a G7 report read, they could potentially threaten the global financial stability and monetary system.
Financial Action Task Force president Xiangmin Liu said that both stablecoins and the companies behind them would be subject to global standards on cryptocurrencies and traditional financial assets, thus joining the growing number of regulators expressing concerns over Facebook’s Libra.
France’s economy and finance minister, Bruno Le Maire also repeated his criticism of Libra, saying he cannot allow its existence.
TON investors could be left in the cold due to a reimbursement clause in the contract. Legal experts weigh in.
Telegram’s grand entry into the cryptocurrency world is in limbo. After months of rumors, hype and anticipation, Telegram Open Network’s (TON) titan $1.7 billion sales round was declared illegal by the United States Securities and Exchange Commission (SEC).
Just days before the Oct. 16 public token distribution, the SEC dealt Telegram a crippling blow by issuing an emergency action and restraining order. Down, but not out, Telegram is now officially postponing the TON launch date. But after a “force majeure” clause in the purchase agreement was made public, investors are concerned that Telegram could shirk its obligations to return funds from Gram token sales in the event of a delay.
The road to the SEC gatekeepers is strewn with slain projects, many dreamed up by bigger and wealthier players than the Durov brothers. For a while, at least, Pavel and Nikolai seemed to have sidestepped dealing with the SEC altogether. But as always, when dealing with the SEC, the devil is in the details.
After withdrawing to reassess its options, Telegram hit back with a strongly worded legal challenge to the SEC, requesting to deny the commission’s injunction. The firm argued that it has voluntarily engaged with the authority for the past 18 months, only to be slapped with the ban at the eleventh hour. The legal challenge shows Telegram isn’t going anywhere without a fight.
Telegram files legal rebuttal
Telegram announced it would analyze its options in the aftermath of the SEC emergency action. A few days of ominous silence followed, broken only by the forthright legal challenge from Telegram filed on Oct. 16. In the filing, Telegram formally requested the United States District Court for the Southern District of New York to deny the SEC’s request for a preliminary injunction.
Published with only two days to spare before the counterclaim window closes, the filing does not mince its words, stating that the “SEC’s instant application is an ‘emergency of its own making.’” Telegram appears to lay the blame at the feet of the SEC, claiming that it had gone above and beyond to assist the commission:
“Telegram produced to the SEC thousands of pages of documents and communications with U.S. purchasers; submitted five detailed legal memoranda regarding the securities question at issue; participated in three in-person presentations during which it answered hundreds of questions and requested feedback; regularly engaged in email and telephone discussions regarding a wide range of topics relating to the TON Blockchain and Grams; and made modifications to the technology and operation of the TON Blockchain in response to the SEC’s stated concerns.”
Telegram also suggested that the SEC deliberately left their legal action until the last minute with the firm’s obligation to reimburse investors in mind:
“The SEC (i) never requested that Telegram delay the launch of the TON Blockchain; (ii) never advised Telegram of its intention to seek injunctive relief; and (iii) waited until the eleventh hour to file an ex parte application to enjoin Telegram’s launch.”
The company’s complaints are not limited to timing or etiquette alone. Telegram also stated that the SEC’s classification of Grams as a security is incorrect and that the tokens are merely a currency or commodity such as gold or silver:
“The SEC’s action hinges on a fundamentally flawed theory that Grams constitute a ‘security’ subject to the U.S. securities laws — a theory that runs counter to longstanding Supreme Court precedent, the SEC’s own views.”
While arguing that the SEC’s claims are baseless, along with the commission’s readiness to fight any legal challenge in court, Telegram elected to delay the launch of TON and the token distribution date until all legal issues are resolved. Telegram also argued in the filing that there is no need for the court to enter a preliminary injunction.
SEC claims Telegram breached Form D restrictions
Although the public token distribution was eagerly awaited by the crypto community in October, the event that drew the ire of the SEC is embedded in the fine print of the company’s February 2018 private sales round.
In February 2018, Telegram filed what is known as a “Form D,” a type of application that relieves companies of the obligation to register their securities with the SEC. While this might sound like a staggering oversight in an otherwise robust framework of regulatory law, the Form D does not give applicants full freedom to act at will. Mark Boiron, partner at U.S. law firm FisherBroyles, explained the premise of a Form D to Cointelegraph:
“A Form D is filed only when an offering is completed under an exemption from registration under the Securities Act of 1933, known as Regulation D.” This exemption is most commonly used by crypto projects that make use of Simple Agreements for Future Tokens (SAFTs) to sell the rights to receive tokens, and in doing so, are selling a security. Boiron went on:
“As a result, the projects that use SAFTs need to file a Form D. If you search Form D on the SEC’s website for the term ‘simple agreement for future tokens,’ then you will see many results pop up. The other time a Form D is filed would be when crypto itself is sold as a security, but that is rare.”
Companies looking to stave off the all-seeing eye of the SEC need to choose from two possible exemptions, both with their own respective restrictions. The first, 506(b), bears the most constraints for prospective applicants. Under this exemption, applicants may sell the security to accredited investors, along with a maximum of 35 nonaccredited investors. The caveat: The security cannot be advertised. The SEC also gave a description of which nonaccredited investors are eligible for sales:
“Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.”
Telegram chose the second, a decision that would play a central role in the SEC’s decision to stop TON dead in its tracks — 506(c). This exemption allows the security to avoid SEC registration if sold to accredited investors alone, while permitting the applying company to advertise.
This fateful decision is the epicentre of the SEC’s restraining order. Although the initial coin offering (ICO) may well have sold to accredited investors, those very same investors could resell their newly acquired assets. For the SEC, this constituted a violation of the exemption. Consequently, the SEC alleged that Telegram and TON did not register their sale of the Gram tokens, which it considers securities.
In its Oct. 16 legal challenge to the SEC, Telegram sought to dispute the claims that Grams were offered through an ICO, stating that the company has never engaged in such an activity. The firm maintains that the tokens were sold in private purchase agreements according to the necessary regulatory framework:
“Unlike other digital assets that were offered to the general public through so-called Initial Coin Offerings (‘ICOs’), Telegram did not — and will never — offer any securities to the public through an ICO.”
In a statement to Cointelegraph, attorney for German legal firm Winheller, Benjamin Kirschbaum, explained that attempting to prevent regulation by the SEC is fairly common:
“It is quite common to try to prevent regulation by the SEC and similar authorities by only targeting qualified investors. While the definition of what a ‘qualified investor’ is differs from jurisdiction to jurisdiction, at least in the Western Hemisphere such an offering usually does not need to submit a prospectus.”
Gary E. Murphy, counsel at New York-based legal practice Debevoise & Plimpton, told Cointelegraph that although the Form D application route is available, it is difficult to launch a cryptocurrency in a compliant way in any other form than a security, as determined by the Howey Test:
“For the SEC to not view TON as a security, one prong of the Howey test would have needed to not exist. The most likely way to achieve that in a new network is to build the network with the funds from the SAFT sale under Regulation D and publicly disclose that the issuer (in this case Telegram) will no longer provide any development or other efforts to grow the network as a technical matter or to bring users to the network.”
Murphy added that this route might not be the most appealing to Telegram from a business standpoint, as it would deny a swift launch of the service, “As a result, there are very few, if any, real options to launch TON compliantly.”
TON seeks delay
According to an investor message shared with Cointelegraph on Oct. 16, Telegram announced to investors that it will seek to delay the launch deadline to April 30, 2020. In the letter, published on Wednesday, Telegram outlined that moving the deadline will require the permission of a majority of purchase amounts received by Telegram in relation to the Stage A purchase agreements. The same requirements for an extension of the presale round also apply.
Such an arrangement, however, means that one group of investors could vote to extend the deadline, while the other may not. The firm has encouraged investors to make a decision about the extension before Oct. 23, ahead of the Oct. 24 court date with regulators in New York.
Majeure trouble ahead: Legal experts speak out
As if the ban and impending court date wasn’t enough drama for both investors and Telegram, another legal technicality with the potential to have a major impact reared its head on Oct. 14. Should the delay to the network launch go ahead, investors that participated in the gargantuan Gram sale event may not see their spent funds in the near future.
As previously reported by Cointelegraph, Telegram’s pledge to return money to investors could be superseded by a so-called “force majeure” clause in its purchase agreement. Contrary to the company’s claims, the force majeure clause of the contract outlined that the company is absolved of responsibility for any delay caused by acts of God, natural disasters, war, and most importantly, governmental action or regulatory changes. Debevoise & Plimpton’s Murphy outlined to Cointelegraph that the presence of the force majeure clause does not necessarily equate to a total loss of investment funds:
“The Force Majeure clause, on its face, does not explicitly reference the termination provision in Clause 7.1 or the obligation thereunder to pay the Termination Amount if Network Launch has not occurred as of October 31, 2019. Thus investors may have a technical argument that the Force Majeure provision simply doesn’t apply with respect to the obligation to either launch the TON Network by October 31, 2019 or pay the Termination Amount.”
According to Murphy, investors could argue that Telegram is more than able to return funds from the Gram token sales rounds by virtue of the firm’s size and revenue, thereby cancelling out the need for the force majeure:
“They might point out that the Telegram Messenger app is functional and has a very large user base, which can provide an alternative source of funds for covering the payment of the Termination Amount. Telegram also has traditionally had access to funding from its founder.”
Kirschbaum postulated that the validity of the force majeure could depend on the type of investor involved in the purchase of the Gram tokens:
“Since the prospectus requirements and other rules regarding securities are in place to protect the average investor, the rules regarding qualified investors shall enable issuers to only deal with experienced clients (such as banks, security brokers, insurance companies, experienced wealthy individuals) where the lawmaker presumes that they can do their own due diligence before investing in any vehicle.”
If Kirschbaum’s hypothesis is correct, judges could side against accredited investors if the scenario, based on questioning the investor experience and assuming due diligence was conducted, does indeed occur. Regarding noninstitutional and inexperienced investors that do not fit the SEC description, Kirschbaum added that the clause may not be applicable:
“Since those investors are presumably experienced, a section in the T&C like Telegram, where a return of investment is excluded due to regulatory issues, seems valid. In such cases, experienced investors can make up their own mind on how high the risk of regulatory action is.”
Gary Murphy told Cointelegraph that investors could press on Telegram for knowingly keeping them in the dark regarding the securities classifications of the token, saying: “Given that Telegram did not treat TON as securities, there could very well be a claim investors could bring. However, without seeing all of the offering documents, it is difficult to judge.”