Battle, not a war
How Pavel Durov hitting on SEC and is there a bright future for TON
Quite a lot had happened since my last publication on Telegram Open Network. As you may have heard that in October 2019, the US Securities and Exchange Commission (SEC) achieved a ban on the issuance and distribution of GRAM tokens. The Telegram team decided to postpone the launch of the network and offered investors to take 77% of the investment (the rest of the funds went to Telegram infrastructure maintenance and TON development) or wait until April 30, 2020. Absolutely all investors decided to stick with the project. However, in March ’20, the court again has extended the ban on the distribution of tokens, stressing that it concerns not only US investors.
Now American investors are offered to take 72% of their money, and investors from other jurisdictions — to issue a loan and receive 110% of the invested funds in a year. The company refused to distribute tokens. The reason for the change in plans is regulatory risks. At the same time, on May 7, the TON developer community launched the network on its own without Telegram.
Where does the company hope to find money to pay off the debt, did Durov give up the idea of launching TON, and what development options does the project have? Let’s try to answer all these questions.
Telegram was about to conclude a new agreement with investors
On April 29, Durov offered investors a choice:
- Take 72% of the invested funds now (the remaining 5% of 77% were spent on Telegram and development over the past months);
- Wait until April 30, 2021, and if the network is launched, pick up GRAM or “potentially another cryptocurrency” in accordance with the original agreements, or receive 110% of their investments (which is almost 53% higher than the amount they could take now). To agree, it was necessary to fill out a special loan agreement — according to which the investor refused any claims against the company.
The letter emphasized that the company “continues to discuss the project with the relevant authorities,” but the agreement could be revised if regulatory restrictions were imposed on this.
If GRAM is still not allowed in the United States by the end of April next year, Durov sells his stake in Telegram (he owns the company solely) and returns funds to investors with interest.
How Telegram offers have changed
However, according to The Bell and several other media outlets, on May 4, TON investors received a letter from the Telegram team in two versions: for American investors and for investors from other countries. Both letters contain messages about changes to the terms of the offer dated April 29.
The letter to American investors says that they will not be able to choose the option with a return of 110% of the investment in a year and can immediately take 72% of the investment. This decision was made in the interests of both parties, in order to “reduce unnecessary regulatory risk.”
In a letter to investors from other jurisdictions, it is said that Telegram is abandoning a previously announced proposal to issue tokens in 2021 due to regulatory risks and uncertainties. The company is ready to conclude a new agreement with them. To do this, investors must prove that they are not residents of the United States and do not live there until May 5, by sending documents confirmation until May 11.
Where will Durov get money to pay off investors?
The loan is needed to stretch the payments over time. The company must return to investors at least 72% ($ 1.2 billion) of their invested $ 1.7 billion in TON. Taking into account interest, the amount will be higher. Now the company does not have that kind of money — it has repeatedly emphasized that it spends investors’ money on maintaining the infrastructure and developing its messenger. And the funds are also spent on continuing a legal dispute with the SEC.
It is unknown to whom and for how much Durov is going to sell a stake in Telegram. There is no official estimate the messenger capitalisation. The letter says that the monthly audience of the messenger is 400 million people and every day there are 1.5 million app installs. Therefore, based on the assessment of other messengers at similar stages of growth, the cost of Telegram will be several times higher than the total amount of debt to investors. Probably, we are talking about the amount of $ 4–10 billion.
In 2014, Facebook bought WhatsApp, which then had 450 million monthly active users, for $ 19 billion. Telegram is still focused primarily on the non-Western market and has problems with the authorities, so it can be cheaper. It is difficult to say to whom Durov could sell his stake in Telegram, but the entrepreneur has no doubts that he will be able to profitably sell the messenger, perhaps within a few months.
In March, after the court extended the ban on the distribution of tokens, according to Coindesk, half of TON investors wanted to get their money back on any terms, and half still wanted to launch the network. Coindesk also wrote that, according to Silicon Valley investors, many would prefer the company to pay off the debt in shares.
If the tokens are too risky, stocks are clearly a good way out. However, there may be shaded agreements between investors and Telegram on converting loans into tokens or messenger shares.
What options did Telegram have?
- Launch TON without court permission.
It would be too risky. By transferring the tokens to US investors, the company would deliberately violate securities laws and court orders. This would mean the end of the project and everyone involved with the blocking of accounts and even arrests.
- Recognize GRAM as security and conduct an IPO.
This would postpone the launch of the project for another two years and would allow investors to go to court for a full return on their investment. The latter is quite possible. So, according to insider information from The Bell, there are two groups of investors who are not satisfied with Telegram’s conditions, and they are ready either to sue the company, demanding the return of all 100% of the invested money, or to receive their money in the form of Telegram shares.
- Launch TON without American investors.
Telegram could still launch TON without SEC permission, returning the money to American investors and distributing the tokens among the rest. There are many successful projects on the market whose coins are banned for sale in the United States. This scenario was considered the most likely by most experts.
After all, the trial is not over yet. Formally, Telegram still has a chance to lift the ban or conclude a peace agreement with the SEC by paying a fine, as happened in the case of Block.one and EOS. True, the proceedings may drag on for years, and the appeal — for another one and a half to two years. Obviously, the SEC’s position regarding GRAM as securities will not change — regulators will not risk giving permission to issue an uncontrolled digital asset with potential global coverage. Moreover, it would not remove possible problems with regulators in other countries.
- Make TON more decentralized and launch the network without initial investors.
If Durov is still interested in blockchain, he could try to solve problems with the SEC without old obligations and launch TON without investors, returning them their funds. To do this, he would first have to withdraw the network from the jurisdiction of the SEC and make a TON more decentralized so that the American regulator would consider it a commodity, as is the case with bitcoin or ether. This option could have cancelled the launch of the network by the Free TON community.
- Refuse to launch TON and return the invested funds to investors.
This is the most pessimistic option. True, the possibility of lawsuits on the part of investors and all those involved remains in this case.
All financial markets in the world are somehow connected with the United States, so no one with a clear mind would launch a blockchain platform in opposition to the American regulator. It is also difficult to guarantee the complete exclusion of American investors from the entire chain of users of the TON platform, so the Telegram team made a quite sensible decision
TON without Telegram is a whole other story
There was another option: TON could be launched without Telegram. Technically, everything was ready for this.
Back in the spring, the TON developers considered the possibility of launching the network independently without the participation of Telegram. In February, investors, developers, project validators, and representatives from TON-based companies created the TON Community Foundation, a non-profit organization, to manage the project’s community.
On May 7, TON Community Foundation members launched an alternative version of the TON mainnet called Free TON. The launch declaration was signed by 170 companies and individuals: TON Labs, Bitscale Capital, Certus.one, Ceo.io, Chorus, Everstake, Kuna, Simplex, P2P.org and others. US residents cannot join the declaration.
Free TON is built on the TON protocol. But instead of GRAM, it has free TON Crystal (TON) tokens with a total emission of 5 billion. 85% of them will be received by partners and network users for free, 10% by developers, 5% by network validators. The project will be launched in several stages — this will help to avoid mistakes and ensure smooth development of the protocol. Whether Free TON will be integrated into Telegram is not yet clear.
The website of the project emphasizes that Durov did not participate in the launch. In the comments of RBC, TON Labs CTO Dmitry Goroshevsky noted that the launch of the network was not discussed with the Telegram team, investors learned about the launch from the media.
Free TON is not the same network that Pavel Durov’s team was going to launch. Without the support of Telegram, this is a completely different project — the TON wallet cannot be integrated directly into Telegram, and this was the defining condition for the success of the project. Free TON has a different, more decentralized distribution system and different tokens. TON mainnet investors do not participate in the launch and do not claim tokens, so the fork is legally separate from the original project. Time will tell whether the project will be noticeable without the support of Durov or become one of the unremarkable blockchains. So far, this is just another blockchain, simply with loud promotion.
It’s not over
Now the main goal of the company is to pay off and sort out the investors who have participated in the project, to end the proceedings with the SEC, and to minimize regulatory risks as much as possible. This will take away most of the strength and resources. But this does not mean that the company has abandoned plans to launch the network.
It is not clear how the Telegram team will continue to work on the TON network and how the launch of Free TON will affect the company’s plans. Dmitry Goroshevsky in the comments of RBC also noted that Telegram cannot launch TON and abandoned these plans. If so, it would be a heavy blow to the entire industry — TON was one of the most promising projects that could bring digital assets to the lives of tens of millions of people.
The history of TON in the United States has shown what regulators expect from blockchain projects, especially massive ones. The crypto industry has learned a good lesson and is going to be smarter. Yes, now the SEC has won, but that is just one battle, not the war.