Neil J. Cohen

One of the hot topics in securities regulation and enforcement has been the question of what position the SEC will take with respect to cryptocurrencies. In the following guest post written in the form of a one-scene play, Neil J. Cohen, a lawyer and publisher of the Securities Reform Act Litigation Reporter, imagines a fictional conversation involving an SEC official discussing cryptocurrencies. I would like to thank Neil for submitting his play to be a guest post on this site – this is the first play that has appeared on this site! I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Neil’s play.




Author’s Introduction: This is a hopefully entertaining dialogue on two SEC enforcement actions against cryptocurrencies.  In the scene below, the father is an SEC lawyer. His son is also a lawyer who trades cryptos. The two discuss the motivations to buy and sell tokens, the duty of the SEC to protect small investors, the Howey test, the need to encourage technological innovation and the civil rights of dissidents in the Trump administration.


Setting: Father and son are seated at a table


FATHER:  Are you buying cryptos again?  Why don’t you heed Warren Buffet’s warning that cryptos are “rat poison squared?” He also says that cryptos are a good long-term short sale.


SON: Dad, technology is not Mr. Buffet’s area of expertise. Bitcoin is a store of value and a hedge against depreciation of the dollar. Besides, it’s a cool collectable, that could keep appreciating. Remember Andy Warhol’s Brillo box. It was an exact copy, considered a joke, now it’s a museum piece.


My generation will earn less than yours. How will I ever be able to retire on a golf course unless I’m a great trader or lucky enough to buy the next Bitcoin?  If you watch the price and volume movements of these coins you can sometimes hop on for a quick double or triple. The trick is to sell quickly when the price starts down. It’s like gambling— unless you are a true believer in a particular technology. Then you hold, hoping for wide adoption.


FATHER: You are saying that a crypto is like gold or a lottery ticket. But what about those who fall for the hype, hold on for dear life, and take 90% losses. My job as an SEC lawyer is to protect those people.


SON: Yeah, just like President Reagan sarcastically said, “I’m from the government and I’m here to help you.” I can protect myself Dad.


Besides, the government is supposed to encourage useful innovations like blockchains. Why then did your office enjoin the Telegram messaging service to stop the sale of its Gram token?  Telegram has two hundred million subscribers to its free encrypted service. If subscribers buy and exchange Grams, they could eliminate the middleman charges imposed by banks and credit card companies.  Mr. Hinman from your own SEC office described other uses. He said, “Potential applications include supply chain management, intellectual property rights licensing, stock ownership transfers and countless others. There is real value in creating applications that can be accessed and executed electronically with a public, immutable record and without the need for a trusted third party to verify transactions.”


FATHER: The SEC does not want to prohibit the public from ever buying Grams. We just want to make sure the buyers fully understand the risks. That’s why we believe these tokens should be sold through a more formal securities offering.  That requirement will cost the promotors a lot more and discourage new tokens. But with over 3000 coins on the market we’ve spent enough time liberally encouraging new technology. Now government agencies are cracking down.  IRS has forced token holders to report every trade as a gain or loss instead of treating the trades as like-kind exchanges.  The commodity regulators have allowed institutions to make short sales or buy put options on Bitcoin, which should deflate the price. To prevent money laundering and terrorism, the United States Financial Crimes Enforcement Network (‘FinCen”) may soon prohibit networks that don’t record buyer and seller information for each transaction.    


SON:  I thought the “SAFT” (Simple Agreement for Future Tokens) was supposed to balance investment risk and token utility. I can understand why you think these risky digital assets should not be offered to the public before the public can use them. But the SAFT divides the sale into two parts. The first most risky part would be a formal security offering to institutions or accredited investors. After the blockchain is working those investors could sell tokens to the general public for their utility. Since the Telegram sale was a SAFT, why wasn’t that legal?


FATHER: The two steps of the sale are only a theoretical distinction. In practice, institutional investors typically buy the first offering under 2 cents with the expectation of selling for 20 cents or more to young people who hope to strike it rich by buying the next Bitcoin — or at least make a profit. It’s like a Ponzi scheme where a few early investors profit and the late comers probably take a bath. Its speculation for profit from beginning to end. It doesn’t matter if the promoter’s White Paper doesn’t promise or even hint that buyers will make a profit. We can assume that the prevalent motive for all buyers is to make money because they buy a lot more tokens than they use.


SON: But the SEC appears to be taking different positions on the enforcement against SAFT offerings. For example, the SEC fined but did not try to enjoin or rescind its huge $4 billion “securities offering.” In the Telegram case the SEC got an injunction to stop the sale. What’s the difference?


FATHER: In the promotors stated the value of the tokens would be increased by third parties who would make the applications for the blockchain. In Telegram the tokens were designed to be used by 200 million messenger users. This close connection supports the SEC’s view that the tokens are securities under the Howey test because their increase in value depends on Telegram’s efforts.


Of course, promoters are always supposed to increase token value by continually improving the speed and scalability of their blockchains. So it comes down to a balancing test that weighs the promotor’s contribution to value compared to third parties.


When Telegram was sued it did not assert a bright line defense that the tokens are exempt because they are inherently useful.  Instead it maintains that, as applied to it, the SEC’s standard is unconstitutionally vague.


The SEC doesn’t have the resources to challenge all of these offerings but the Telegram token is especially problematic. Telegram could enrich itself by starting to take advertising money. Then, after the Gram is in circulation, Telegram could increase the Gram’s value by offering buyers ad-free messaging.


Then there is the question of Telegram’s leadership. The company was founded and is managed by a radical libertarian named Pavel Durov.  He is nicknamed the “Mark Zuckerberg of Russia” because he made millions by founding a social media platform there. But when Putin told him to turn over personal information on dissidents he refused. Durov then had to leave Russia. He set up Telegram to be a free encrypted messaging service.  He has refused to sell personal information to advertisers or sell ads. He is currently supporting Telegram with the money he made in Russia.


Durov could use the Gram to promote his political views. In response to a terrorist attack in France he is on record as stating, “The French government is as responsible as the Islamic State for this because it is their policies and carelessness that eventually led to this tragedy. They take money away from hardworking people of France with outrageously high taxes and spend them on waging useless wars in the Middle East.”


Now this guy wants to launch a cryptocurrency. The last thing the U.S. needs is a charismatic idealist promoting an encrypted currency to 200 million fellow rebels. The sale could even affect the dollar, the world’s most trusted trading and investment currency. But the federal deficit will soon be 140% of the Gross Domestic Product. The growing debt is unsustainable.  The government stopped Facebook’s Libra coin because it was a threat to the dollar. Now we are protecting the dollar from Telegram.


SON: A better way to protect the dollar would be for Congress to respect budgetary restraints. But since Congress no longer seems to care, citizens are smart to hedge with digital currency.


If Trump wins the next election, the drift from democracy to autocracy will accelerate. The government may well track dissidents and how they spend their money. There may even be capital controls to keep dissidents from moving their money abroad.


I agree with you that currently the SEC has a strong case that the Gram is a security. But that will change if a Trump reelection becomes tyrannical. Then, under the Howey balancing test, the primary catalyst for the popularity of the Gram will not be Telegram: It will be the government.