"Hashing" It Out: Federal Jury Decides Some Cryptocurrency Products Are Not Securities

[...]in 2020, a federal district court in Manhattan held that a digital currency sold by the messaging platform Kik was a security.7 The SEC sued Kik in 2019 alleging that it engaged in an unregistered sale of securities when it sold US$100 million of its new digital token, "Kin. "11 Earli...

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Bibliographic Details
Published in:Computer and Internet Lawyer 2022-04, Vol.39 (4), p.3-5
Main Authors: Boutros, Andrew S, Kelly, Anthony S, Kelley, David N, Spangler, Timothy, Perlow, Mark D, Schleppenbach, Jay, McGinley, Peter J
Format: Article
Language:English
Subjects:
Blockchain
Computation
Cryptography
Currency
Digital currencies
Juries
Law
Legal defense
Securities fraud
Security
State court decisions
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Summary:[...]in 2020, a federal district court in Manhattan held that a digital currency sold by the messaging platform Kik was a security.7 The SEC sued Kik in 2019 alleging that it engaged in an unregistered sale of securities when it sold US$100 million of its new digital token, "Kin. "11 Earlier in 2020, another federal judge in Manhattan granted the SEC's request for a preliminary injunction barring the launch of a new cryptocurrency blockchain.12 Telegram, a popular messaging application, raised US$1.7 billion from investors in 2018 to develop its own Telegram Open Network blockchain.13 In return, Telegram promised investors they would receive "Grams," digital currency that would launch with Telegram's blockchain.14 But the SEC sued Telegram in 2019, arguing it sold unregistered securities by offering Grams to investors.15 Although Telegram conceded that its investment contracts were securities, it argued that Grams, which did not yet exist, were not securities.16 In its ruling, the court explained that "[i]n the abstract, an investment of money in a cryptocurrency utilized by members of a decentralized community connected via blockchain technology, which itself is administered by this community of users rather than by a common enterprise, is not likely to be deemed a security under the familiar test laid out in [Howey]. "18 In reaching this conclusion, the court found that investors expected to profit off their Grams based on Telegram's efforts to develop and implement the blockchain.19 Recent Jury Verdict Finds That Cryptocurrencies are Not Securities In 2016, a class of plaintiffs sued Stuart Fraser, a former vice chair of Cantor Fitzgerald, in federal district court in Connecticut for securities fraud based on his alleged involvement in selling four cryptocurrency products, including "Hashlets. "20 The plaintiffs were likely emboldened by an earlier SEC enforcement action against Fraser's business partner in which the SEC claimed that Hashlets were securities.21 Hashlets were marketed as portions of computing power used to mine Bitcoin.22 Hashlet investors were promised that they would share in the profits realized from a Hashlet-powered Bitcoin mining operation.23 Plaintiffs sued after learning that the Fraser-backed business had far less computing power than it let on, causing them to lose out on their investment.24 Fraser argued that the four crypto products at issue, including Hashlets, were not securities so he could not be liable for securities fra
ISSN:1531-4944