CFTC’s General Counsel voices stance in action against Telegram

Maria Nikolova

The CFTC’s Office of General Counsel says digital currencies are commodities, adding that many securities are commodities.

In line with a request by the New York Southern District Court, the Commodity Futures Trading Commission has filed a Letter with the Court, outlining its views on certain matters in the action targeting Telegram Group and TON Issuer.

The Letter, submitted at the Court on February 18, 2020, and seen by FinanceFeeds, does not provide an explicit answer to the question on whether “Grams” are securities or not.

The CFTC’s Office of General Counsel say they understand that the defendant, Telegram Group, Inc., argues that its planned digital currency, the “Gram,” will be a commodity and not a security, and therefore not subject to registration under the Securities Act of 1933 (“’33 Act”).

Digital currency is a commodity, the CFTC letter says. However, the Commodity Exchange Act (“CEA”) provides that many securities are commodities to which the securities laws apply. Thus, any given digital asset may or may not be subject to the securities laws, but that does not depend on whether the asset is a commodity. It depends on whether the asset is a “security” within the meaning of the ’33 Act itself.

The CFTC’s Office of General Counsel explain that the statute defines “commodity” to include various tangible and intangible assets that fall into three categories:

  • Enumerated Commodities: “wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice”;
  • Catchall for Other Goods and Articles: “all other goods and articles, except onions (as provided by section 13–1 of this title) and motion picture box office receipts (or any index, measure, value, or data related to such receipts),” and
  • Catchall for Services, Rights, and Interests: “all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery [i.e., futures contracts] are presently or in the future dealt in”.

Many securities fall within the third prong of that definition. Hence, while digital currency is a commodity, that does not resolve the question of whether the ’33 Act applies to Gram. That depends on the securities laws. The CFTC’s Office of General Counsel express no view on that question in the Letter.

According to the SEC’s complaint, Telegram Group and TON Issuer Inc. started raising capital in January 2018 to finance the companies’ business, including the development of their own blockchain, the “Telegram Open Network” or “TON Blockchain,” as well as the mobile messaging application Telegram Messenger. The companies sold approximately 2.9 billion digital tokens called “Grams” at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 US purchasers.

Telegram promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019, at which time the purchasers and Telegram will be able to sell billions of Grams into US markets.

The SEC’s complaint alleges that the companies failed to register their offers and sales of Grams, which, according to the SEC, are securities, thus violating of the registration provisions of the Securities Act of 1933.

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