Unclear regulations stymie digital asset innovation, lawyers say – Roll Call

The agency announced the settlement of an enforcement action as recently as Friday, when Dubai-based Telegram Group Inc., a messaging app company, agreed to return more than $1.2 billion to investors and to pay an $18.5 million civil penalty over an unregistered offering of digital tokens called Grams in 2018.

“The structure of the securities laws and the often-used exemptions from the registration that’s normally required is problematic here because the crypto world has embraced so many new and innovative products and offering strategies,” Hinkes said. “A lot of these issuers only found out that they failed when a regulator gave them a call or filed an enforcement action against them.”

“I think people back in the 2017 to 2018 time frame were trying to come up with creative solutions and were willing to take chances,” Sadeghi said.

SEC Chairman Jay Clayton said in 2017 that there are cryptocurrencies that do not appear to be securities. And other agency officials have indicated, in nonbinding guidance including public statements, that the SEC supports cryptocurrency. But confusion persists, experts say.

“Compliance with securities law is costly, in part, because in crypto, it is fraught with uncertainty,” Yuliya Guseva, a Rutgers University law professor and expert on cryptocurrency, said in an email. On one hand, the SEC’s approach gives it flexibility on enforcement, but on the other, it leaves market participants without clear direction, she said.

Companies tried to distinguish their ICOs from securities by planning to relinquish control of the coins after the capital was raised, Guseva said.

That was the case with Telegram, the company that settled Friday. The U.S. District Court for the Southern District of New York rejected its concept of separate phases, holding that the substance of the entire coin offering was part of a single scheme that constituted an investment contract subject to registration and disclosure rules.