The United States Commodity Futures Trading Commission has recently weighed in on the Security and Exchange Commission’s ongoing legal battle with Telegram by filing a letter that contained its views on the case. According to the submitted document, the CFTC’s Office of General Counsel believes that all digital currencies are commodities, thus implying that Telegram’s Gram token is not a security and therefore not subject to registration under the Securities Act of 1933. 

With that being said, the CFTC did concede that the Commodity Exchange Act does afford certain securities with the status of being commodities — to which security laws also apply. Regarding the Telegram case, the regulatory body refrained from passing any specific comments or judgments, stating that it had no particular views on the matter. 

However, it is interesting to note that the CFTC’s comments came just hours before an important hearing on the case was scheduled to take place, leading many crypto enthusiasts to believe that the U.S. government is trying its best to curb the growth of the country’s crypto market. 

On Feb. 18, court documents revealed that an anonymous venture capital firm — known simply as Investor F in the documents — requested authorities to redact a few pieces of evidence that had been submitted as part of the first court hearing between the SEC and Telegram. To be a bit more specific, Investor F claimed that some of the emails requested by the SEC contained a host of confidential data detailing the firm’s strategic plans regarding certain prospective cryptocurrency investments and custody solutions. 

The SEC might be trying to make an example out of Telegram

Following the CFTC’s recent involvement in the SEC vs. Telegram case, a number of people are beginning to wonder if regulatory authorities in the United States are making a concerted effort to slow down the progress of digital currencies in America. 

To discuss this notion further, Cointelegraph reached out to Jefferey Liu Xun, the CEO of XanPool — a fiat-gateway software solution for exchanges, wallets and other cryptocurrency businesses. As he sees it, regulators tend to set the letter of the law in a manner that is not only ambiguous but also very overreaching, thereby making it possible for prosecutors to interpret the law in a number of ways that might be most suitable for them. Xun further added:

“I believe this is a case of the CFTC trying to make an example out of GRAM, because if they successfully persecute Telegram, then that would set an incredibly powerful precedent to persecute other smaller projects as well since GRAM certainly has raised a lot of money compared to most other projects.”

He further opined that the SEC and CFTC, more often than not, work in tandem so as to increase their personal power and overall responsibilities — all while claiming to be working in the best interest of the American consumer market. 

Furthermore, Sidharth Sogani, founder and CEO of research and intelligence company Crebaco Global, told Cointelegraph that the SEC and CFTC are concerned about the case because of the size of the Gram token’s initial coin offering and the number of users Telegram has. He added:

“According to Telegram, the firm’s number of monthly active users will cross 1 billion by 2022. The SEC and CFTC don’t want 2.9 Billion Gram tokens flooding the markets, because as of today they are locked, but once released they could go beyond their control.”

A closer look at the SEC’s definition of a commodity and security

The SEC defines a security as being any “transferable instrument representing an ownership interest in a corporation (equity security or stock) or the debt of a corporation, municipality, or sovereign.”

Therefore, other forms of debt, such as mortgages and certain derivatives, can also be considered securities. Also, from a traditional perspective, a security can be equated to the shares of a firm that gives an investor ownership rights of the company. However, as things stand, the same principle cannot be applied to utility tokens.

Now, in regards to Telegram’s groundbreaking ICO that took place a couple of years back, it is now public knowledge that TON, or Telegram Open Network, was able to raise a whopping sum of $1.7 billion by selling around 2.9 billion Gram tokens — which the company claims are utility tokens. Also, even though Telegram had set up base in the British Virgin Islands for its ICO, the SEC was able to intervene in the matter because the firm raised money from American citizens. 

On the subject of whether Gram tokens constitute an investment product or not, Sogani believes that owing to some of the loopholes that currently exist in the SEC’s formulation of laws on digital assets, the matter remains quite ambiguous. For example, as per the websites of the SEC and CFTC, ICOs can be classified as security token offerings under certain conditions. However, these conditions have not been clarified in detail, and thus Telegram does have a case on its side. Sogani further pointed out: 

“Telegram’s token is not a security ideally, because it’s not like a share which gives ownership to the shareholder. It is a utility token which can be redeemed against the services of Telegram or its blockchain Telegram Open Network. The SEC is claiming that because it raised from American investors, it shall be under the regulations which are for STOs. Even if we consider Gram to be a digital token/currency it will still fall under CFT’s guidelines.”

Lastly, he believes that the regulatory stance of the United States government on digital currencies is still not clear, as the nation’s financial regulators are still unable to understand several core aspects of the crypto industry. In Sogani’s view, many of the SEC’s regulations currently have loopholes that are being leveraged by various legitimate as well as scammy projects, adding: “It is time that the SEC re-drafts its regulations related to crowdfunding and raising money through virtual tokens.”

What could the verdict potentially look like?

With the outcome of the Telegram–SEC case set to be decided by April 30, a number of crypto pundits are quite eager to see how this entire scenario plays out. Gregory Klumov, the CEO of Stasis — the company behind the EURS stablecoin — told Cointelegraph that the U.S. government is quite clearly against the creation of any decentralized entity that has the power to provide settlement in a currency other than the U.S. dollar. He elaborated, “Such projects are the top targets for the SEC and other regulators, and they will do everything to ensure that the launch of such platforms never happens.”

In Xun’s opinion, the trial can play out in one of two different ways: Either Gram and its creators will be prosecuted — which essentially means that the U.S. legal system will set a precedent for prosecutors to have complete reign over all matters related to the country’s crypto sector — or Telegram will have to settle for a fine, probably a small portion of total raised funds, similar to how Block.One did with its EOS ICO. He further added:

“Regardless of what happens, more projects will position themselves outside of the USA, as the US market would be reserved for those with the money to either comply with its draconian laws or pay off the prosecutors.”

A similar view is shared by Sogani, who is also of the opinion that the case most likely favors the regulators. He believes that Telegram will either be required to pay a certain fine or initiate a refund to its American customers. Whatever may be the case, Sogani is doubtful that Telegram will get an honest chance in the matter.