Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Court orders Telegram to return $1.2 Billion to Ton Cryptocurrency Investors

A federal court ordered the promoters behind the TON cryptocurrency to return $1.2 billion to investors in what could be a groundbreaking ruling.

The SEC alleges the Telegram Group Inc.’s Grams; or TON, cryptocurrency is really an unregistered security. Thus, Telegram; and its subsidiary TON Issuer Inc., violated federal law by selling 2.9 billion Grams in October 2019, the SEC alleges.

Telegram will return the $1.2 billion and pay an $18.5 million fine to settle an SEC complaint and court case. Telegram agreed to the settlement on June 26, 2020, an SEC press release indicates.

Court rules a Cryptocurrency is an Illegal Security

The TON; or Telegram Open Network, (TON) cryptocrrency was proposed by Russian entrepreneur Pavel Durov.

Durov planned to use TON to add financial services to his Telegram Messenger encrypted social media service. Durov wanted to embed the TON cryptocurrency and a Peer-to-Peer (P2P) payment mechanism in Telegram. Telegram is an encrypted social media service similar to WhatsApp.

The SEC, however, alleged TON was a scheme to evade federal securities laws in an October 11, 2019 complaint. In the complaint, the SEC asked the U.S. District Court for the Southern District of New York for an injunction blocking the Grams sale.

The court issued the injunction on March 24, 2020. The action is important because the court ruled the SEC has the authority to regulate cryptocurrencies and other digital securities. Consequently, the SEC can ban the sale of cryptocurrencies and other blockchain products.

Court Rules TON Cryptocurrency violated Securities Act

In particular, the SEC alleges Telegram violated the Securities Act of 1933 by selling the Grams. Thus, blockchain entrepreneurs; such as Durov, will have to register cryptocurrencies and other blockchain investments with the SEC. 

“This settlement requires Telegram to return funds to investors, imposes a significant penalty, and requires Telegram to give notice of future digital offerings,” Kristina Littman said. Littman is the Chief of the SEC Enforcement Division’s Cyber Unit.

Jorge G. Tenreiro, Kevin P. McGrath, and Ladan F. Stewart of the New York Regional Office, Alison Levine of the Cyber Unit, and Hope Augustini of the SEC’s Office of the General Counsel litigated the SEC’s Telegram case. Daphna A. Waxman, Morgan B. Ward Doran, and John O. Enright of the Cyber Unit investigated the Telegram case for the SEC.