UPDATE: Jan. 8, 2020: The encrypted messaging app Telegram has until Thursday to show a federal district court that its bank records comply with foreign data privacy laws.

A judge with the District Court for the Southern District of New York on Monday denied the Securities and Exchange Commission's Jan. 2 request to force Telegram to reveal its bank records. The regulator wants to know how Telegram spent $1.7 billion raised in its initial coin offering in 2018.

Telegram's lawyers officially requested Friday that the SEC application be thrown out, calling it an "unfounded fishing expedition."

Dive Brief:

• The Securities and Exchange Commission (SEC) filed an emergency action Friday and obtained a temporary restraining order against encrypted messaging app Telegram and its parent company for the sale of $1.7 billion in digital tokens, called Grams, to investors.

• Telegram Group Inc. and TON Issuer Inc. began raising capital in January 2018 to finance the development of their own blockchain, the "Telegram Open Network," as well as the mobile messaging application Telegram Messenger.

• The tokens function as securities, and therefore should have been registered under the Securities Act of 1933, the SEC said in its complaint.

Dive Insight:

Defendants sold approximately 2.9 billion digital tokens at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 investors in the U.S.

Telegram promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than Oct. 31, at which time the purchasers and Telegram will be able to sell billions of Grams into U.S. markets.

"Our emergency action ... is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold," Stephanie Avakian, co-director of the SEC's Division of Enforcement, said in a statement. "We allege that the defendants have failed to provide investors with information regarding Grams and Telegram's business operations, financial condition, risk factors, and management that the securities laws require."

For all intents and purposes, the tokens are securities because "the initial purchasers and subsequent investors expect to profit from Telegram's work: the development of a TON 'ecosystem,' integration with Messenger, and implementation of the new TON blockchain," according to the complaint. "Grams are not a currency because, among other things, there are not any products or services that can be purchased with Grams. Rather, there is an expectation on the part of investors that they will profit if Telegram builds out the functionalities it has promised."

"We have repeatedly stated that issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token," said Steven Peikin, co-director of the SEC's Division of Enforcement. "Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public."