What We Can Learn From Telegram's Token Troubles

Telegram's success blinded investors to the risks inherent in building blockchains and raising a token sale, says a long-time observer.

AccessTimeIconMay 1, 2020 at 5:46 p.m. UTC
Updated May 9, 2023 at 3:08 a.m. UTC

Sandro Gorduladze is a partner at HASH CIB, a financial services firm specializing in digital assets. The opinions expressed here belong solely to the author. 

Telegram runs the world’s largest independent messenger not controlled by a tech giant like Tencent or Facebook, both distrusted by users on privacy grounds. Populations of large countries such as Iran and Russia rely on it for uncensored communication. Civic activists from Hong Kong to Catalonia coordinate massive protests with Telegram. And, the global crypto community makes a modest contribution to its 400 million active users. In other words, this company and its future is important for the free world. 

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  • Yet, this future is in jeopardy. Telegram fought off pressures from nation states and behemoth competitors to support its users’ freedom but lost a legal battle with the U.S. Securities and Exchange Commission this March. It was a preliminary court decision – but there’s much at stake. 

    Some backstory: In early 2018, Telegram, seeking financing, conducted a private sale of its yet-to-be-created cryptocurrency in exchange for $1.7 billion from Silicon Valley’s top venture funds, big private investors and a few then-lucky others to fill the gap between those groups. 

    The future

    The company’s fate is now to be decided by those stakeholders. After April 30, they can exercise their contractual right for a refund. Should this happen, the company would be drained of the money it needs not only to continue the legal dispute with the SEC, but maintain the infrastructure and development of its messenger (yearly burn rate is estimated at $200 million by founder Pavel Durov). Telegram would have to return investors around $1.2 billion they expected to have left from the fundraiser by now.

    This week, the company offered investors a proposal to extend the deadline for another year (in addition to the six months investors gave it back in October 2019 when the dispute erupted). Telegram wants to use this year to resolve its legal troubles and launch the blockchain. In return, it offered investors a token on the original terms or in the form of "another cryptocurrency." As a fallback option, Telegram promises 10% on top of the full investment amount (instead of just 72 cents on the dollar refunded now) to be paid from selling the stake in the company to a party external to the discussed transaction. So the company expects to spend $1.87 billion (excluding the runway and legal costs it will incur in the process) it doesn’t yet have if it loses its own bet to resolve legal troubles with the SEC in one year. 

    Telegram hopes to turn almost free capital from 2018 into cheap capital in 2020, while risking to it becoming very expensive come 2021.

    Investors are offered a choice: to get back their 72 cents on a dollar now versus receiving some cryptocurrency, or a dollar and 10 cents in a year from now. Their opportunity cost is uncertain given the economic crisis we’re currently in. But some would argue it’s pretty high. Telegram hopes to turn almost free capital from 2018 into cheap capital in 2020, while risking to it becoming very expensive come 2021.

    Top litigators point out the preliminary injunction against Telegram granted to the SEC in March is ambiguous. Some also insist the future of compliant token fundraising and overall crypto innovation is also jeopardized here. Other legal experts believe the order to halt TON could be overthrown on appeal, or if the case ever reaches actual trial. Yet, some non-legal experts argue that, from a business standpoint, justice has been served. For now, though, what matters is what Telegram’s investors think. 

    The past

    As a company (HASH CIB) counting some of the larger (non-U.S.) investors in TON (the Telegram Open Network) among our clients, we closely followed the project from its inception. My research team has produced lengthy coverage reports on TON, investor notes and updates. 

    Our readership, unfortunately restricted only to industry professionals and accredited investors, know we’ve long calledhttps://hashcib.com/research/a_TON_of_Grams.pdf their attention to the project’s execution risks, including issues related to U.S. securities laws. But in all honesty, we did not expect these issues to materialize the way they did.

    Telegram used the late peak of the 2017 initial coin offering wave to finance its messenger for years ahead, without having to give up control of the company. Getting a shot at creating a public blockchain to compete with Bitcoin and Ethereum was a secondary goal, yet very attainable. Building a blockchain didn’t seem that difficult given the open source nature of the industry, and the network effects were all on Telegram’s side. No public blockchain came even relatively close in the size of Telegram’s user base, while being able to reach market capitalizations of tens of billions of dollars at the same time. 

    Given the team’s track record in shipping great products and its ever-expanding user base, investors down-weighted issues related to complexity of their technological goals and inexperience with blockchains. At the time Telegram was aiming at high-calibre venture funds and family offices, turning down specialist crypto investors. Had some of those investors been given allocations, Telegram might have received more support from top crypto insiders, who are often consulted by U.S. regulators.

    Telegram’s troubles started not really with the manner in which it sold its future tokens. Most of the projects at the time used similar rhetoric and tactics, including large ones, later let off the hook by the SEC or investors

    What mainly prompted TON’s problems was that Telegram was too ambitious in its technological aspirations and didn’t care to harness a developer and user community around their ambitions. Legal concerns could explain why the company did very little to engage with future users of its cryptocurrency (and this could be addressed after launch, given the messenger’s popularity). But its in-transparency didn’t help. The team stuck to an internal team of “star programmers,” first-time blockchain devs and leveraged little external help and subsequent open-source peer-reviewing and testing – an uncommon practice for such a massive endeavor. That cost them  development time before the SEC got involved. 

    Telegram was too ambitious in its technological aspirations and didn’t care to harness a developer and user community around their ambitions.

    Telegram hasn’t engaged much with its own investors either. Investors were continuously unclear as to when TON would launch or what services it would eventually provide. The company seemed to believe that users, developers and investors would continue supporting it regardless. Maybe that explains why investors didn’t come out after the March court decision to help the company turn things around and negotiate restructuring prior to the April 30 deadline. Will they be willing to take the equity offer if Telegram doesn’t find a suitable buyer a year from now?

    The present

    With all that in mind, going back to the recent offer Telegram made to its investors, the following questions arise:

    Would the company be able now to retain funds sufficient to fight the SEC, maintain its ever-growing messenger, continue developing the blockchain and potentially fight additional legal claims from some of its investors? The significant portion of the remaining $1.2 billion would need to be retained to make it happen.

    If it indeed does, would it be able to win the litigation in a year’s time and launch TON as initially envisioned, or if it loses, find a buyer for its equity, willing to pay for the aftermath?

    What if it doesn’t retain the funds necessary, not even the $200 million to $300 million to both focus just on the messenger and fight off potential other complaints?

    Answers to these questions aren’t unknown. There is much corporate history to back them up. I believe investors are finally getting a chance to get a piece of the company come April 2021. And that’s what some of them wanted when participating in its crypto sale: exposure to Telegram’s growth and success. This is less relevant for the crypto industry, though, which I hope stays unaffected. More than that, I also hope the outcome of this doesn’t affect Telegram 400 million loyal users. But of that I am less certain.


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