As cryptocurrency and blockchain technology have expanded, so too have regulatory scrutiny and ensuing litigation. The lack of a uniformly applicable regulatory framework–particularly regarding whether virtual currencies constitute securities subject to the federal securities laws and registration requirements–has led to confusion and uncertainty. Recently filed “fintech” actions are poised to establish precedent in this novel legal landscape.

The Securities and Exchange Commission (SEC) Enforcement Division’s recently created cyber unit investigated and recommended the commission bring charges in several cases in 2019 involving blockchain technology and digital assets. In June 2019, the SEC filed its first contested litigation against a digital asset issuer, alleging violations of federal registration requirements.[2] In the complaint, the SEC alleges that between May and September 2017, Kik Interactive Inc. offered and sold one trillion digital tokens for approximately $100 million but failed to file a registration statement with the SEC for its offer and sale of securities.[3] The main issue the Kik court is expected to address is whether an initial coin offering (ICO) is a securities offering subject to the registration requirements of the Securities Act of 1933.

In October 2019, the SEC obtained a temporary restraining order in the U.S. District Court for the Southern District of New York, preventing Telegram Group Inc. and its wholly owned subsidiary TON Issuer Inc. (together, Telegram) from making a $1.7 billion digital token offering without filing a registration statement.[4] Telegram agreed to postpone its offer and sale of tokens until after a court hearing scheduled for Feb. 18 and 19 on the SEC’s request for a preliminary injunction to prevent the offering. Telegram has contested the SEC’s theory that its tokens constitute securities, alleging it does not intend to offer them through an ICO but instead plans to sell through private agreements, which are exempt from registration requirements.

The ultimate determinations by the Southern District of New York–the federal court in Manhattan hearing both of these cases–are expected to shed light on the status of cryptocurrency offerings, but it remains to be seen whether any bright-line rules will be established.

[1] Securities and Exchange Commission’s Division of Enforcement 2019 Annual Report at 12.

[2] The case is SEC v. Kik Interactive Inc., No. 19-cv-5244 (SDNY).

[3] SEC v. Kik Interactive Inc. Complaint at ¶¶ 1, 18.

[4] The case is SEC v. Telegram Group LLC et al, No. 19-cv-9439 (SDNY).