Rise and fall of Telegram Open Network

Messaging service Telegram has abandoned its blockchain platform Telegram Open Network (TON) after a lengthy battle with the U.S. Securities and Exchange Commission (SEC).

Almost two months ago, Pavel Durov announced the final closure of the TON project. Two and a half years ago, he raised $1.7 billion from investors for a revolutionary blockchain that was to completely turn people’s ideas about payments and build a decentralized Internet. Durov blamed the failure of the project on an unfair decision by an American court, and his investors blame the entrepreneur himself. It is not clear how the story will end, but the closure of the TON project is not the end yet.

Where everything started

In January 2018, when everything started, it seemed that the project had a great future. In two rounds, ICO Telegram raised $1.7 billion from investors. Durov was lined up to give money for a revolutionary project, and he had only to choose who he would take and who he would refuse without explanation, investors say.

In January 2018, when everything started, it seemed that the project had a great future. In two rounds, ICO Telegram raised $1.7 billion from investors. Durov was lined up to give money for a revolutionary project, and he had only to choose who he would take and who he would refuse without explanation, investors say.

TON was supposed to be an ecosystem that could replace the usual Internet. The project included not only its own services and applications, but also something similar to websites. The key service was supposed to be the payment system TON Payments and the crypto wallet associated with it. The blockchain architecture was to allow for unprecedented transaction speed — millions of transactions per second.

Telegram promised investors a phenomenal return on their investment — dozens of times. One of the buyers was hinted in early 2018 that a “10x-50x” return on the invested amount was likely, according to Telegram court materials with SEC. Pavel Durov himself was engaged in marketing Gram as a promising cryptocurrency during this period.

What went wrong

Telegram promised its investors the cryptocurrency at a time when it seemed that there were no problems with digital money and there wouldn’t be any. Bitcoin and Ethereum popularity was spreading very widely. But the first alarm bell rang six months before ICO — in July 2017. At that time, the SEC published the results of the investigation into The DAO’s crypto project, in which it first recognized cryptocurrencies as securities. This could be seen as a direct warning: all such offerings in the US without token registration with the SEC would be in violation of US laws.

The SEC proved to be consistent in this position. In September 2017, Canadian messenger Kik conducted a $100 million ICO. This case was similar to Telegram’s history: the company sold Kin tokens to investors, which, like Gram, were to become the internal currency for the platform built around the messenger and its applications. As with TON, the founders of Kik submitted to the SEC a notice on form D (release of an instrument that is not subject to registration). In the summer of 2019, the SEC filed a lawsuit against Kik prohibiting the circulation of Kin with the same justifications as they later filed with Telegram. The company was not ready for a long trial: Kik raised $5 million for lawyers through crowdfunding and reduced the number of employees from 151 to 19. As a result, the company’s founder, Ted Livingstone, announced that the messenger was closing and the company would only deal with the cryptocurrency and court with the regulator. The proceedings are still ongoing.

Block.One was more fortunate: it had an ICO worth $4 billion, but had managed to do so before the SEC published its report on The DAO. Block.One paid the SEC $24 million fine, but managed to issue the cryptocurrency and did not have to return money to investors.

There was some interesting things, learned from TON court materials in 2020: before the second round of offering in 2018, the SEC contacted Telegram and started asking questions — that is, Durov was aware that commission is watching its token sale process, says one of the TON investors. And here comes an important question: should Durov have warned his investors about it separately? Yes, it’s not an IPO and there’s no need to do this, but it raises questions: was it an accidental cover-up or deliberate?

The fact that company was aware of the risks is implicit in the text of the agreement that Telegram gave to its investors to sign: it stipulated that the actions of the authorities and the application of legislation or regulatory standards will be a force majeure — along with floods, fires, earthquakes and so on. In addition, the agreement expressly stated that no government agency approved the release of tokens and made no recommendations about investing in Gram, which means that the cryptocurrency will be released and delivered to customers at their own risk.

All plans destroyed

October 11, 2019 — less than a month before TON blockchain was due to be launched and investors would have gotten Gram — the SEC sued Telegram and completely destroyed all plans of both the company and its investors. Telegram was temporarily banned from releasing Gram. At the end of October, a week before the launch, Telegram offered investors to take 77% of their current investment — or wait another six months, until April 30, 2020. Until then, the company promised to either solve the problem with the regulator or return the money to investors.

It was not possible to solve the problem, but instead Durov promised his non-American investors to do the best he could: to return 110% of the original investment in a year. For those who didn’t believe in him, the entrepreneur promised to give back 72% right away.

From court materials it became known that Telegram has 175 investors (funds and individuals), 39 of them from the USA. The Americans have invested $424.5 million in TON, including the largest funds in the Valley: Kleiner Perkins, Benchmark and Sequoia Capital. Among Russian investors, besides David Yakobashvili and Sergey Solonin, who themselves spoke about their investments, were Roman Abramovich, Said Gutseriev and Mikhail Abyzov.

But it is hard to say how many people took part in the offerings: right after the rounds the gray market around the project flourished, investors say. Funds resold the rights to tokens, groups of investors created companies that owned the rights to Gram, and sold their shares — each time with their own markups and commissions. Telegram was not aware of what was going on, it was said in statements of its employees and Durov himself in court, and if he found out, he tried to stop the resale of Gram. The agreements on the sale of rights to Gram explicitly stated that resale of tokens before the release is prohibited. The main result of all this story — an indefinitely wide range of people, including large businessmen, were extremely dissatisfied with the situation.

It is very unlikely that TON will be launched in the nearest future. The project come to an end, the bad end. Investors are left with nothing but big losses after their participation in the TON offerings. But you still have an opportunity to earn cryptocurrencies — join our crypto lotto Ethex.bet to earn big prizes in ETH!

Blockchain enthusiast developer and writer. I love video games, blockchain and the hot symbiosis of these two worlds.