Will Telegram’s blockchain project turn into legal, technical and financial failure?

This story initially appeared in East-West Digital News, an international news resource covering the Russian innovation scene.

Last week Telegram, the messaging app founded by Russian tech genius Pavel Durov, postponed yet another time the launch of its blockchain platform TON and cryptocurrency Gram. The release is now scheduled for April 2021 with a clawback clause for investors.

Through a controversial ICO in early 2018, Telegram raised some $1.7 bio from 171 investment funds and wealthy individuals, including 39 US investors. Among these are such prestigious Silicon Valley funds as Kleiner Perkins and Sequoia.

Under the initial plan, an early MVP version of TON was scheduled for release in Q2 2018 and the actual launch of the TON services was promised for 2019.

In August 2018, the main components of the platform were reported to be completed “by 90%.” At that time, many people in the tech and crypto industry still believed in TON, some even seeing in Durov the “killer” of Bitcoin.

The release was postponed several times, however.

In October 2019, after the US Securities and Exchange Commission launched a lawsuit against Telegram, the company set a new deadline to April 30, 2020.

Hostile to the launch of the Gram cryptocurrency, the US regulator sees in the 2018 ICO an unregistered securities sale. In March 2020, a US judge ruled that Telegram cannot launch its blockchain or issue the Gram tokens until the case was resolved. This decision left little hope that the April 30, 2020 deadline could be met.

Between relief and disappointment

As the new delay was announced last week, Telegram wrote a letter to the TON investors, maintaining they could ultimately receive “grams or potentially another cryptocurrency on the same terms as those in their original Purchase Agreements.”

However, the company conceded, this outcome still depends on how the discussions with the relevant authorities will turn out. Thus, other options are offered to the investors: 

  • They may get an immediate refund of 72% of the invested amounts;
  • They may receive 110% of the original investment if they will wait until the new planned launch date (April 30, 2021).

Should regulators continue blocking the project beyond this date, Telegram says it would repay the debt using company equity.

“With 400 million monthly users and an organic growth of 1.5 million sign-ups each day, Telegram is the #1 most downloaded social media application in 27 countries (…). Based on the valuation of messaging services at similar stages of their growth, we believe Telegram’s equity value will exceed the aggregate amount of its potential debt resulting from this offer by at least several times,” Telegram explained to the investors.

Just days later, in an unexpected volte-face, Telegram requested its US investors to immediately exit the project by accepting the 72% refund offer. “An uncertain regulatory attitude in the United States” left no other option for investors from this country, Telegram said.

As for non-US investors, they may still benefit from the 110% refund promise, but Telegram will reserve the right to make the refund them unilaterally anytime until April 30, 2021 – in any proportion between 72% and 110% of the initial investment, proportionately to the time elapsed from April 30, 2021.

This is yet another change since October 2019, when Telegram offered to refund 77% – not 72% – to investors willing to withdraw from the project.

At the time, however, “investors chose to reject the offer and agreed to extend the deadline for issuing the tokens to April 2020,” notes “The market was strong and most investors revealed a desire to receive tokens over refunds.”

The 5 percentage point difference seems to originate from the fact that, meanwhile, the company continued spending money on developing the project. As of January 2020, as shown in court documents cited by TheBell, Telegram had already spent $405 mio of the $1.7 bln it raised in early 2018.

Nevertheless, some investors expressed satisfaction with the new terms offered by Durov. In an exchange with CoinDesk, QIWI co-founder and $17 mio TON investor Sergey Solonin said, citing the promise of additional returns: “The terms are really good, I think a lot of investors will choose to keep their money in Telegram.”

“There is definitely capital value there, and even if Telegram will ultimately not be allowed to issue grams, I think, in the course of this year [it] can find an investor and pay the money back [to the token purchasers],” the Russian businessman added.

CoinDesk also reported that “many investors, especially the Silicon Valley venture funds, would prefer to have their token allocations converted into Telegram shares.” Some of these ICO investors viewed the Telegram TON token as proxy for Telegram’s equity, which Durov was unwilling to sell thus far.

Amid the current pandemic and economic crisis, however, a substantial number of investors may demand an immediate refund, even losing 28% of their initial investment, several sources reported.

Post-ICO failure?

The delays in TON’s launch have not only been the result of the SEC’s attempt to block it.

Anton Rozenberg, former Vkontakte CTO and Telegram executive, is among those who doubt of the technical readiness and robustness of the TON platform. “While the software is far from being ideal even in presentation and documentation, there’s no way it could be ready to issue tokens on an exchange,” he said in a recent media interview. “After launch, the project could collapse both technically and economically in the absence of any demand for such tokens.”  

“In a decentralized network, the cost of mistakes is way higher than in the case of an instant messenger. If someone steals millions or billions of dollars, there’s no way to get them back,” he added.

While the 2018 ICO was a brilliant tactical success, Durov’s strategic skills have been less convincing in Rozenberg’s view.

“Everything in this ICO seemed magic: Telegram managed to raise on a virtual project as much or even more than the company itself could have been valued – with almost no commitments to investors and no equity loss.”  

“The white paper was beautiful and looked smart, there was a team, there was plenty of money; it seemed there was plenty of time, too. But soon after the ICO, it appeared that not much time was actually left and that everything was more complicated than planned.”

Echoing these views, the SEC’s lawsuit contains not only legal considerations that aim to define the Gram tokens as securities. As noted by CoinDesk, the commission also argues Telegram did not create a viable blockchain, as it promised to do.

While aspiring to outperform bitcoin and ethereum, “Telegram has presented no concrete evidence that it has achieved that goal” providing merely a “vague, conclusory statement” the blockchain is “fully functional and ready to be launched,” the SEC insisted.  

The TON project is not dead, but its developers have just one year left to prove the skeptics wrong.

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