Weekly Focus:

  • Preliminary Injunction Against Telegram Covers Distribution of Grams Outside of the United States
  • SEC Postpones Decision on Approval of Boston Security Token Exchange
  • Binance Acquires CoinMarketCap
  • Blox and Sovos Crypto Tax Report 2020
  • Financial Action Task Force Finds that U.S. is “Largely Compliant”
  • Russia Delays Adoption of Crypto Law

 U.S. Developments

Preliminary Injunction Against Telegram Covers Distribution of Grams Outside of the United States

In the latest development in the ongoing enforcement action by the Securities and Exchange Commission against Telegram Group Inc. and TON Issuer Inc. (together “Telegram”), the District Court of the Southern District of New York rejected Telegram’s request for clarification to the preliminary injunction which, if accepted, would have enabled Telegram to issue Gram tokens (“Grams”) to non-U.S. purchasers. The preliminary injunction, which was granted on March 24, 2020, has prevented Telegram from distributing Grams to high net worth individuals and entities (“Initial Purchasers”) that purchased the right to receive Grams under pre-sale agreements in 2018 (“Gram Purchase Agreements”).

In Telegram’s letter to Judge P. Kevin Castel, which was framed as a clarificatory request as to the injunction’s scope, Telegram asserted that the injunction should not apply to the distribution to foreign purchasers based on precedential case law that limits the appropriate extraterritorial application of the federal securities laws. Specifically, Telegram asserted that the injunction was inappropriate for distributions to foreign purchases since both Telegram Group Inc. and TON Issuer Inc. “are non-U.S. persons and the majority of Initial Purchasers are not U.S. persons and that the Gram Purchase Agreements with these non-U.S. parties were entered into outside the United States through contracts containing foreign choice-of-law provisions.”[1]

In his order rejecting Telegram’s request on April 1, 2020, Judge Castel confirmed that distribution to foreign purchasers falls within the scope of the preliminary injunction, which encompasses the delivery of “Grams to any person or entity or taking any other steps to effect any unregistered offer or sale of Grams”.[2] He further explained that the “security,” which was identified in the preliminary injunction and is the subject of the order, “was neither the Gram Purchase Agreement nor the Gram but the entire scheme that comprised the Gram Purchase Agreements and the accompanying understandings and undertakings made by Telegram, including the expectation and intention that the Initial Purchasers would distribute Grams into a secondary public market.”[3] Lastly, he also indicated that this argument was raised at the improper time and should properly have been raised in Telegram’s earlier briefs in opposition to the initial preliminary injunction request.

On March 27, 2020, shortly after the preliminary injunction was put into place, Telegram filed an appeal to the United States Court of Appeals for the Second Circuit. For now, Telegram cannot distribute Grams.

Injunction Order

Telegram’s Clarification Request Letter

SEC Response to Telegram’s Clarification Request Letter

Order Denying Clarification

SEC Postpones Decision on Approval of Boston Security Token Exchange

In an April 1, 2020 release, the SEC announced that it would be extending the period of review prior to approving or denying Boston Security Token Exchange’s request for rule changes that would permit Boston Security Token Exchange LLC (BSTX) to become “the world’s first regulated exchange for trading security tokens”.[4] BSTX is a joint venture between BOX Exchange LLC and tZERO Group, Inc., an affiliate of Overstock.com Inc.

Per the SEC, “BSTX proposes to operate a fully automated, price-time priority execution system to list and trade NMS [National Mark System] stocks that meet BSTX listing standards and for which ancillary records of ownership reflecting certain end-of-day security token balances as reported by market participants would be created and maintained using distributed ledger technology…”.[5] The extension of the review period will allow the SEC to collect additional comments from industry participants and experts.

In their release, the SEC briefly summarizes two comment letters that they received noting that the commentators both felt that additional time was needed to consider whether the proposal was consistent with the Securities Exchange Act of 1934 (the “Exchange Act”). A key voice in opposition to the proposal has come from Nasdaq. On March 27, 2020, Joan Conley, Senior Vice President and Corporate Secretary for Nasdaq, wrote a comment letter to the SEC that laid out Nasdaq’s objections. In addition to arguing that the proposal is not consistent with the Exchange Act, Nasdaq also argued that accepting the proposal would “place an unreasonable burden on competition because the blockchain (ledger) technology used to track ownership of the security token—the only aspect of this instrument that is unique—would not have a common distributed ledger”.[6] Nasdaq’s concern is that securities listed on the BSTX blockchain would not be easily transferable to other security markets, therein giving an unfair advantage to BSTX.

The window to submit additional comments is open for three weeks, with an additional two weeks available for commenters to respond to comments submitted by other parties.

April 1, 2020 SEC Release

Nasdaq March 27, 2020 Letter to SEC

BSTX Website

Binance Acquires CoinMarketCap

Binance, a leading cryptocurrency trading platform, confirmed it closed a deal on March 31, 2020 to acquire the company that runs the popular cryptocurrency data tracking website CoinMarketCap. According to the CoinMarketCap updated disclosure policy, “[w]hile the Binance cryptocurrency exchange and its native token BNB are listed on CoinMarketCap, CoinMarketCap and Binance are separate entities that maintain a strict policy of independence from one another: Binance has no bearing on CoinMarketCap rankings, while CoinMarketCap has no influence over Binance’s operations.”[7]

In connection with the transaction, Carylyne Chan will replace Brandon Chez as interim Chief Executive Officer. The deal size and structure has not been publicly disclosed.

Announcement on CoinMarketCap’s Blog

CoinMarketCap Disclosure Policy

Blox and Sovos Crypto Tax Report 2020

A report conducted by Blox and Sovos and released this week surveyed numerous U.S. based verified CPAs familiar with cryptocurrency accounting and taxation matters. The report found that there is a strong belief among tax specialists in the space that there will be significant crackdowns on U.S. taxpayers who have, or will, misreport cryptocurrency transaction when filing their 2019 tax returns.

The report further concluded that many cryptocurrency investors are unaware of how to properly report their cryptocurrency transactions and that many taxpayers will also need to “work retroactively to ensure they filed prior year taxes according to the latest guidelines.” A large majority of the specialists asserted that many of their clients should be receiving 1099s in connection with their trading activities but are not currently receiving such tax forms. The majority of specialists were also not confident that the 1099 forms that are being delivered are correct or comprehensive.

Full Report

Financial Action Task Force Finds that U.S. is “Largely Compliant”

The Financial Action Task Force (FATF), an intergovernmental organization that rates governments on their success in preventing money laundering and terrorist financing through digital assets, rated the U.S. overall as “Largely Compliant.” Although the “[t]he U.S. has made progress to address the technical compliance deficiencies identified in the MER [the initial mutual evaluation report adopted in 2016]…” it still is only rated as partial compliant or non-compliant on nine specific recommendations.

Full Report

International Developments


The Swiss Financial Market Supervisory Authority (FINMA), the Swiss government body responsible for financial regulation, released its 2019 annual report this week. The report provides a comprehensive review of the activities of FINMA in 2019 and covers a review of, among other things: market developments and innovation, supervisory activities and enforcement actions, developments in regulation, and international affairs. One development that the report covers in detail is the increased interest in stable coins in 2019 and FINMA’s efforts to address the increase in the number of stable coin projects.

Full Report

Russia Delays Adoption of Crypto Law

The Chairman of the State Duma Committee in the Financial Markets (part of Russia’s lower house of parliament) discussed the delay in adoption and current structure of the bill on digital assets in an interview with Happy Coin News. Chairman Aksakov pointed to the COVID‑19 pandemic as the main reason the bill has not made its way through the legislative process. However, the bill is in final form and is expected to be passed in the near future. The bill does not address cryptocurrency mining, but does, in the opinion of Chairman Aksakov, provide for the regulation of cryptocurrency trading platforms that are operating within Russia.

Interview with Anatoly Aksakov

[1] https://www.courtlistener.com/recap/gov.uscourts.nysd.524448/gov.uscourts.nysd.524448.234.0.pdf

[2] https://www.courtlistener.com/recap/gov.uscourts.nysd.524448/gov.uscourts.nysd.524448.234.0.pdf

[3] https://www.courtlistener.com/recap/gov.uscourts.nysd.524448/gov.uscourts.nysd.524448.234.0.pdf

[4] https://www.bstx.com/

[5] https://www.sec.gov/rules/sro/box/2020/34-88536.pdf

[6] https://www.sec.gov/comments/sr-box-2019-19/srbox201919-7004559-214854.pdf

[7] https://coinmarketcap.com/about/