Securities and Exchange Commission (SEC)’s Hester Peirce disagreed with the regulator’s in the latest battle to shut down Telegram’s GRAM’s project in a speech during the Blockchain Week in Singapore on Tuesday.
Hester, known as “Crypto Mom” for her efforts in the regulation of blockchain and cryptocurrencies, said she did not agree with the SEC “from the beginning,” further criticizing the court’s decision and the implications on global security laws. Hester Peirce started off her statement on Telegram by saying,
“Last month’s settlement was the unsatisfying culmination of an enforcement action that I did not support from the beginning.”
Telegram in line with SEC’s security laws
In the speech titled, Not Braking and Breaking, Peirce elaborated that Telegram using the Simple Agreement for Future Tokens (SAFT) offering structure, the company was able to comply with SEC’s arrangements through two distinct levels.
The first stage involves. Telegram raising funds to develop the TON blockchain through selling interests in GRAMs to accredited investors to which Hester said were conducted under Rule 506(c), which gives a valid exemption from registration requirements of GRAMs. This allowed the investors to wait until the network launches to be able to use the tokens, closing doors on speculative purposes of the token.
However, it is the second stage that brought about the fierce court battles and subsequent closure of the project. This stage would see Telegram launch the TON project and follow up by distributing the tokens to the accredited investors. Here is where the court and probably SEC got it wrong, she said. Once distributed, the investors could choose to resell on the market, which the authorities view as selling security.
However, Hester explains that the sold tokens are digital currencies as they will be used to buy and sell on the TON blockchain once fully functional – a foresight that the regulators lack.
A differentiation problem
Peirce further tears into the court decision voicing her dissent on the court’s and SEC’s inability to distinguish between the token and an investment contract. Furthermore, Hester questions why SEC focused on applying the Howey Test, which gives guidance on what a security is, on the first SAFT level only.
“By focusing the Howey analysis exclusively on the original transaction, the factual reality of the transaction that the court halted was lost.”
She further claims that the Howey Test would “shed little light on whether the sale of tokens that are usable on a functioning digital network are securities.” This is simply because the Howey’s Test does not separate between the agreement between Telegram and the accredited investors and the GRAM token as separate entities.
A risky precedence
Hester also focused on a debate that Telegram’s CEO brought to light in his last address on the SEC case – SEC’s jurisdiction in global markets. The court injunction ruled that Telegram could not distribute its tokens to any person across the world despite the messaging app not being a U.S. company. Hester said,
“While the United States certainly has the most robust capital markets in the world, […] we would do well to recall that our way is not the only way. We should be cautious about asking for remedies that effectively impose our rules beyond our borders.”
Following the closure of the $1.7 billion ICO offering, Pierce did not support the settlement as distributing tokens does not automatically resort to a securities transaction. In her closing remarks, Peirce questioned the overall benefit of the ICO shut down as accredited investors, regulators, Telegram, and global investors who would have bought GRAMs did not gain from the closure of the project.
Also Read: Telegram Open Network (TON) to End Testnet By August