Thursday, February 20, 2020

CFTC defers to securities laws in Telegram matter

By Anne Sherry, J.D.

By invitation of the judge overseeing the SEC’s lawsuit against Telegram, the CFTC expressed its view that the "Gram" digital currency, while a commodity, may be subject to the registration requirements of the Securities Act. Telegram, which raised $1.7 billion via agreements for the purchase of Grams, argues that it was not required to register the offering because Grams "will constitute a currency and/or commodity—not securities under the federal securities laws."

The CFTC’s letter to the court denies that "commodity" and "security" are mutually exclusive categories. According to the agency, digital currency is indeed a commodity—but this classification does not equal a carve-out from the Securities Act registration requirements. The Commodity Exchange Act provides that many securities are also commodities to which the securities laws apply.

While the CFTC has exclusive jurisdiction over transactions involving commodity derivatives, its jurisdiction over the commodities themselves is generally limited to policing those markets against manipulation and fraud. The Commodity Exchange Act contains other provisions that preserve the SEC’s jurisdiction over securities. In the CFTC’s view, this includes certain commodities in the category of services, rights, and interests, which may also be securities. It is also possible that a given commodity may qualify as a security at certain points in time and not others.

Whether a digital asset is subject to the securities laws does not depend on whether the asset is a commodity, but rather whether the asset is a security within the meaning of the Securities Act, the CFTC writes, citing SEC v. W.J. Howey Co. (U.S. 1946). The Commission added that it expresses no view on the question of whether the Securities Act applies to Gram.