Pavel Durov, CEO of Telegram, blogged on Wednesday 13 May to announce the end of the Telegram Open Network project: “I am writing this post to officially announce that Telegram’s active involvement with TON is over.” [blog post]
Pavel Durov thought this was just the illustration to convince everyone of the injustice Telegram had suffered.
Stop callin’, stop callin’, I don’t wanna think any more
This is a remarkably whiny blog post, even for a rich libertarian.
Durov complains about a US court claiming jurisdiction over … a scheme to sell tokens to US investors for hundreds of millions of US dollars, with a detailed plan to use these US investors’ influence to get US exchanges to accept the tokens so that they could be dumped on US retail.
Durov is also upset that the US court wouldn’t accept a slight tweak to the scheme so Telegram would only dump the tokens on non-US investors. He doesn’t note the judge’s objection — that the tokens would immediately flow back to US retail investors.
Telegram dealt with the US at all because that’s where the money is. If you want to do business where the money is, there are going to be rules. If you want to do an investment scheme that ends at retail buyers, you have to register it as one, properly.
Telegram could go to the effort of all the initial and ongoing public disclosures to register something Gram-like as a proper security, which anyone could buy — but then it wouldn’t be a free money tree, like the original plan.
Durov makes a telling analogy:
Imagine that several people put their money together to build a gold mine – and to later split the gold that comes out of it. Then a judge comes and tells the mine builders: “Many people invested in the gold mine because they were looking for profits. And they didn’t want that gold for themselves, they wanted to sell it to other people. Because of this, you are not allowed to give them the gold.”
Firstly, Durov is literally describing a security-like investment scheme. And schemes like this are completely legal! If you register them properly.
If you raise funds by selling tokens, then the tokens are securities — and you have to properly register them as securities to sell them to retail investors.
Secondly, Telegram didn’t really see TON as a blockchain network — they saw it as a gold mine.
Wha-wha-what did you say? Oh, you’re breaking up on me
The past month showed Telegram just how little hope they had here. On 24 March, Judge Kevin Castel had granted an injunction against the release of Gram tokens on the TON blockchain. Castel also filed a 44-page Opinion and Order, which is a delight to read in itself. [Opinion and order, PDF; case docket]
In a Hail Mary pass, Telegram then asked Judge Castel to allow them to release Grams outside the US, if not inside. Castel declined the request on the grounds that the TON Blockchain was designed to make these securities flow with very little traceability, and they’d obviously end up in the US. And the SEC’s complaint and injunction were filed in October 2019, and Telegram had had six months to object to the terms of the injunction. [Opinion and Order, PDF]
The injunction blocked Telegram’s promises to TON investors to release something — anything — by 30 April. So, on 29 April, Telegram offered to return 72% of the money to investors as cash now — or 110% in a year, if they could ever launch any version of this thing. The 110% could be paid out as “grams or potentially another cryptocurrency on the same terms as those in their original Purchase Agreements.” Or maybe as equity in Telegram. [CoinDesk]
Telegram had disclosed in legal discovery that they had spent $405 million of the $1.7 billion from investors, on developing TON and running the Telegram Messenger network. Returning 72%, or $1,224 million, leaves them with $71 million.
On 8 May, Telegram and the SEC agreed that Telegram would produce more discovery — assets disbursed to purchasers, agreements with purchasers, and bank records. This is the stuff the SEC asked Telegram for in February. [Stipulation and Order, PDF]
’Cause I’m out in the club and I’m sippin’ that bub
The code for the TON Blockchain still exists and is publicly available as open source code. So a Free TON blockchain was proposed in March, and finally launched on 7 May. [Forklog; Free TON Community]
Free TON asked Nikolai Durov, brother of Pavel, who ran the TON development effort, to join the initiative — but Telegram can’t have any involvement in Free TON without the risk of breaking the injunction, and they’re not that stupid.
The TON Blockchain code, as released by Telegram, runs a Distributed Proof of Stake blockchain with smart contracts. There’s various other fancy bits, which I outlined in December 2018. I presume that’s what Free TON will be using and developing further. Free TON are calling their token Crystal, not Grams. [GitHub]
Free TON are not selling their Crystals as an investment opportunity, and say they’ll be decentralising completely at some point. It’s not clear how that will work for all the companies, including crypto hedge funds, with their logos on the Free TON front page.
Nobody will care much about Free TON if it hasn’t got Telegram-endorsed Grams on it — the original investors certainly won’t.
In his blog post, Pavel Durov cautions investors about efforts like Free TON: “While networks based on the technology we built for TON may appear, we won’t have any affiliation with them and are unlikely to ever support them in any way. So be careful, and don’t let anyone mislead you.”
I do notice, though, that the illustration (above) that Durov put on his blog post features a very Free TON-looking crystal on a flag. I wonder where that came from.
I left my head and heart on the dance floor
Now that Telegram has pulled the plug on the project, I presume they’re frantically negotiating an end to the matter with the SEC.
The SEC originally asked the court to require investors’ money be refunded in full, but I don’t know how hard they’ll push that now. The SEC’s injunction was to protect eventual retail investors from a dump of Gram tokens — but the original investors in TON were all accredited investors, and quite rich enough to understand the concept of an investment in magic beans going to zero.
I presume 72% of the money invested will be returned to the investors — unless said investors are sufficiently unhappy with this plan that they can make their unhappiness stick. And it turns out some investors are planning to sue. “it would be fair to talk about getting Telegram’s equity, for example,” said Vladimir Smerkis of TokenBox. [CoinDesk]
Telegram is retreating and licking its wounds, and the Durovs are crying themselves to sleep on a not-as-big-as-expected bed stuffed full of $71 million — as they try to come up with a business model for Telegram, since the ICO trick didn’t work.
The court's ruling in the Telegram case and the decision to no-token people is completely unsurprising and always yawn-y in it's that what I expectedness.
— Palley (@stephendpalley) May 13, 2020
UPDATE: See today’s newsletter post for what the Telegram ruling means for other token offerings, specifically Kik’s Kin token and Ripple’s XRP.
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