Multiple Parties Weigh In as the Courts Consider Whether a Blockchain Token Is a Security

Overview of the Telegram Case

Telegram, a global messaging platform, was founded by Russian brothers Nikolai and Pavel Durov in 2013.[1] The platform is popular among cryptocurrency enthusiasts because of its libertarian roots, emphasis on privacy[2] and its group-chat feature, which can host up to 200,000 members per chat group.[3] The platform raised $1.7 billion in a simple agreement for future tokens (SAFT) offering in early 2018 to support the launch of its Telegram Open Network (TON),[4] a blockchain network that, according to Telegram, will underpin a new global cryptocurrency featuring digital tokens called “grams.”[5] However, just before Telegram was set to distribute its gram tokens to investors, on Oct. 11, 2019, the Securities and Exchange Commission (SEC) halted the distribution, alleging it was an unlawful securities offering and explaining that the emergency protective order it issued was needed to prevent flooding the U.S. markets with tokens sold in violation of the U.S. securities laws.[6] The future of the network is now in limbo. However, more is at stake, with the U.S. District Court for the Southern District of New York now analyzing whether gram tokens are securities. The outcome of the case will potentially establish long-lasting precedent that could have significant effects on the way cryptocurrencies and other blockchain-based digital assets are categorized in the future.

The Amici Curiae Briefs

The significance of the Telegram case in shaping the legal regime of digital assets prompted the Digital Chamber of Commerce (the Chamber) and the Blockchain Association (the association), two not-for-profit organizations that promote blockchain-based technologies, to file amici briefs. While the Chamber and the association took starkly different approaches, they both asked the court to distinguish between investment contracts, which are securities, and the subject of the investment contracts, which they contend are not securities in every set of circumstances.

Ambiguous U.S. Regulatory Regime

According to the Chamber, outside the United States, blockchain-based digital assets have been categorized as three main types: (1) payment tokens, used as a medium of exchange; (2) utility tokens, which allow users to access a digital resource; and (3) security tokens, which are similar to traditional financial instruments such as debt or equity.[7] However, the Chamber points out that the U.S. currently lacks a clear regulatory regime to address blockchain-based digital assets. The Chamber argues that legal uncertainty associated with developing non-monetary blockchain use cases is detrimental to the burgeoning blockchain ecosystem in the U.S. and has prevented potential new solutions from entering the market. According to the Chamber, “[i]f each movement of digital assets across any of these blockchain networks constitutes a securities transaction, then the companies operating these systems may need to become registered broker-dealers or another type of regulated financial institution or worse, subject to severe enforcement action.”[8] Both the Chamber and the association urge that digital assets not be presumed to be securities.

Amici Argue Relevant Case Law Supports Finding Not All Digital Assets Are Securities

According to the amici, a digital asset is “merely an electronic record,” which is not, per se, a security.[9] The amici argue that the data this digital record represents is separate and distinguishable from any investment contract that may be used as an instrument for fundraising. According to the amici, the court in Howey, which emphasized substance over form, said as much when it provided the current framework for analyzing investment contracts. The amici emphasize that the investment contracts subject to litigation in the Howey case were securities, but the underlying assets themselves, orange groves, were not.

Both amici therefore contend that while investment contracts used to raise funds for digital assets are securities, the analysis is separate and distinct from that to be applied to the digital asset itself. In other words, the amici argue that the fact a digital asset is the subject of an investment contract does not necessarily indicate that the underlying digital asset is itself a security. Therefore, the amici argue that the characteristics of the underlying digital assets should be analyzed separately from the facts and circumstances underlying the scheme used to promote the digital assets.

The amici point out that in Howey, the court observed it was the promise by the promoters to cultivate the small plots of land that created the financial incentive with which to lure investors –not the grove of oranges itself, which alone had no real utility or worth. Citing Forman, another well-known case, the amici argue that “when a purchaser is motivated by a desire to use or consume the item purchased … the securities laws do not apply”[10] and the item is not considered a security, even if the framework used to facilitate its sale is or was a security.

Varying Approaches Proposed

The Chamber suggests a two-pronged analysis when considering whether a digital asset is a security. The first step is to determine whether there is an investment contract underlying the transaction at issue. If there is an investment contract, then the securities laws are triggered. If not, then whether the subject of the investment contract is itself a security becomes the question on which the analysis turns. According to the Chamber, this two-pronged approach faithfully applies the Howey test, which “examines the economic realities of a contract, transaction, or scheme – not the characteristics of the asset that is the subject of such a contract, transaction, or scheme.”[11]

The association argues that other economic realities of a transaction also may indicate that a digital asset is not a security. According to the association, when distribution and promotion of a digital asset are sufficiently distributed or decentralized, no third party can be said to promote such asset. In making this argument, the association quotes a popular speech by the SEC’s director, Hinman, which states that “a digital asset can, over time, become something other than a security” when, for example, “the network on which the token or coin is to function is sufficiently decentralized.”[12] According to the association, circumstances such as this may support the conclusion that digital assets, specifically cryptocurrencies, are not inherently securities.

SEC Files Expert Reports

The SEC has filed three expert reports in the Telegram case, with testimony opining that the network is not decentralized and that a reasonable investor would have purchased the tokens with an expectation of profit. First, Carmen A. Taveras, a Ph.D. in economics who is a financial economist at the SEC, offered her conclusions that (i) the reference price of grams is expressed by an exponential formula, which is a function of the total number of grams in circulation (each subsequent gram is sold for a higher price than the previous gram by at least one billionth of a dollar); (ii) gram investors received significant discounts on the expected reference price at launch; and (iii) the TON reserve’s ability to buy and sell grams per the reference price formula is insufficient to guarantee market price stability of grams.[13] Second, Maurice P. Herlihy, a Ph.D. in computer science, examined the code of the “testnet” version of the TON blockchain and opined that it “lacks critical components that would be required in a fully developed and running system” and that the TON blockchain “is not yet mature enough” to support the apps and services as described in Telegram’s publicly released documents.[14] Finally, Patrick B. Doody, who is a blockchain data scientist at Integra, a forensic data analytics and economic consulting firm, analyzed Telegram’s offering and opined that it was reasonable for a purchaser to buy grams with the expectation of profit to be derived from Telegram’s efforts in developing TON’s blockchain ecosystem.[15]

CFTC Declines to Opine on Securities Analysis

On Feb. 18, the Commodities Futures Trading Commission (CFTC) issued a letter to the judge presiding over the Telegram case, the Honorable P. Kevin Castel, stating that in its view, blockchain-based digital assets are commodities.[16] The letter acknowledges that these digital assets may also be securities but points out that such analysis is within the proper purview of the SEC, not the CFTC. The CFTC declined to offer analysis on the securities issue, citing the Commodity Exchange Act, which provides a savings clause that recognizes the authority of the SEC on this point.

The Hearing

On Feb. 19, the SEC and Telegram’s attorneys participated in a hearing before Castel in the U.S. District Court for the Southern District of New York. The purpose of the hearing was to argue the merits of the SEC’s motion for a preliminary injunction to stop the distribution of gram tokens. At the outset of the hearing, Castel made clear that “[o]ne of the issues that is not presented in this case and that no one has argued is that cryptocurrencies are inherently securities.”[17] According to Castel, “there would be no basis under Howey” to argue that cryptocurrencies are inherently securities.[18]

During the hearing, the SEC and Telegram both presented arguments on the “economic realities” of the gram tokens and the events surrounding their sale. The SEC argued, in part, that Telegram’s sale of grams via SAFTs and its planned distribution of grams “is really one transaction” for the purpose of investment, not consumptive use.[19] Telegram disagreed, arguing that the SAFT sales and the distribution of gram tokens should be viewed separately, with the former being considered a securities offering and the latter sales of commodities. Telegram also argued, in part, that any managerial efforts by the Telegram team with respect to grams were “temporary or transitory” and did not “rise to the level of a Howey promise making an investment contract.”[20]

Castel framed the issue as a “disagreement as to when does the court look at this transaction, at the moment of launch or at the moment the purchase agreements are entered into.”[21] According to Castel, an issue that he would consider is whether the TON network would survive if “Telegram Group and its senior team were to depart the scene” at the time of the SAFT purchase agreements and separately at the time of the TON network launch.[22] Castel noted the parties’ different positions on when the TON network should be considered decentralized. Telegram argued decentralization exists at “the instant of launch,” and the SEC argued “it will not exist then but may very well exist at some point in the future.”[23]

At the end of the hearing, Castel extended the temporary restraining order. This prevents Telegram from distributing its gram tokens until the court renders a decision on the SEC’s motion for a preliminary injunction. Castel indicated that he would rule on the motion prior to April 30, which is the date that Telegram is required to launch the TON network, according to its SAFT agreements.


The Telegram case is expected to be one of the most influential cases involving the classification of blockchain-based digital assets. Because it is often cost-prohibitive for companies to challenge the government in court, the Telegram litigation offers a unique opportunity to present all the varying arguments to an independent arbiter. Whether the case will bring much needed clarity to the varying classifications and treatment of blockchain digital assets in the U.S. remains to be seen. However, in any event, the case is one to watch, as it will very likely affect the future approaches of both the government and industry actors as the nascent blockchain market continues to evolve.

[1] Ari Levy, Secretive Messaging App Telegram Is Selling a $2 Billion Crypto Dream But Skeptics Smell a ‘Ploy’, CNBC (Feb. 15, 2018),
[2] The network’s privacy is debatable, however, since end-to-end encryption is not available by default. And even if such encryption is enabled, it lacks security, according to privacy experts, because it is “home-grown” with no proof offered that it is truly secure. Karen Chiu, How Secure Is Telegram, Abacus News (June 13, 2019),; William Turton, Why You Should Stop Using Telegram Right Now, Gizmodo (June 24, 2016),
[3] Telegram, Group Chats on Telegram, Tour: Groups (accessed Feb. 23, 2020),
[4] Anna Baydakova, SEC: Cash-Strapped Telegram Launched 2018 Token Sale to Pay for Servers, Coindesk (Jan. 17, 2020),
[5] Telegram, A Public Notice About the TON Blockchain and Grams, Blog (Jan. 6, 2020),
[6] Press Release, SEC, SEC Halts Alleged $1.7 Billion Unregistered Digital Token Offering (Oct. 11, 2019),
[7] Brief for The Chamber Of Dig. Commerce as Amicus Curiae Supporting Defs. at 4–5, SEC v. Telegram Grp., No. 19-cv-9439 (S.D.N.Y. Jan. 21, 2020) ECF No. 85 (Chamber Amicus), available at
[8] Id. at 6.
[9] Id. at 9.
[10] United House Found., Inc. v. Forman, 421 U.S. 837, 852–53 (1975).
[11] Chamber Amicus, supra, at 9.
[12] Brief for the Blockchain Assoc. as Amicus Curiae Supp. Defs. at 7, SEC v. Telegram Grp., No. 19-cv-9439 (S.D.N.Y. Jan. 21, 2020) ECF No. 91 (Association Amicus), available at
[13] Decl. of Carmen A. Taveras in Supp. of Pl.’s Mot. For Summ. J. on Liab., at 3, SEC v. Telegram Group, Inc., No. 19-cv-09439 (S.D.N.Y. Jan. 27, 2020), ECF No. 116, available at
[14] Decl. of Maurice P. Herlihy in Supp. of Pl.’s Mot. For Summ. J. on Liab., at 4, SEC v. Telegram Group, Inc., No. 19-cv-09439 (S.D.N.Y. Jan. 27, 2020), ECF No. 117, available at,
[15] Decl. of Patrick B. Doody in Supp. of Pl.’s Mot. For Summ. J. on Liab., at 3, SEC v. Telegram Group, Inc., No. 19-cv-09439 (S.D.N.Y. Jan. 27, 2020), ECF No. 115, available at
[16] CFTC Letter to the Honorable P. Kevin Castel,  SEC v. Telegram Group, Inc., No. 19-cv-09439 (S.D.N.Y. Feb. 18, 2020), ECF No. 203, available at
[17] Tr. of Oral Arg. at 4:18–20, SEC v. Telegram Group, Inc., No. 19-cv-09439 (S.D.N.Y. Jan. 19, 2020) (“Oral Argument”), available at
[18] Id. at 4:21–22.
[19] Id. at 36:10–37:1.
[20] Id. at 41:6–12.
[21] Oral Argument, supra, at 7:11–13.
[22] Id. at 7:19–25.
[23] Id. at 41:2–4.