Telegram’s Pavel Durov bets the house on TON

Telegram CEO Pavel Durov just bet the house in his fight to stop the U.S. Securities and Exchange Commission from killing his Telegram Open Network blockchain project.

In an April 30 letter to investors, Durov put his stake in the Telegram messaging app on the table, offering to reimburse 110% of their investment with his own money if they keep backing the gram token for another year. Otherwise, they can cash out now, getting back 72 cents on the dollar.

The TON blockchain is intended to be a DApp platform. By far the most important would be a payments platform on Telegram messaging service, using gram tokens to transfer funds instantly and nearly free. In 2018, Telegram presold 2.9 billion grams to 175 investors for $1.7 billion. Those tokens will be created and delivered when the TON blockchain goes live with its genesis block. That was originally scheduled for Oct. 31, 2019, but was frozen when the SEC obtained an emergency injunction, calling it an illegal securities offering. 

On March 30, Judge P. Kevin Castel of the federal District Court for the Southern District of New York issued an injunction preventing the sale of the gram tokens, which the original investors hoped to sell at a profit. On April 1, he clarified that his order did not just apply to the U.S. but everywhere. That means the case will drag on for months at least.

But, Durov had promised his 175 investors they could have a 72% refund specified by contract if they did not receive their grams by April 30. So he’s asked for another year.

Durov bets the house

Judging by comments made by Galaxy Digital merchant bank CEO Mike Novogratz, holding on with Durov is probably the best bet.

The Telegram messaging platform “is worth billions and billions,” Novogratz tweeted on April 30. “They know that. It’s [the] number one Platform in most emerging market countries. 400 [million] users. And Pavel owns it 100 percent.”

According to the letter to Telegram investors, Telegram is the No. 1 most most downloaded social media application in 27 countries, including India, Indonesia, Turkey, Russia, Egypt and Brazil. It signs up 1.5 million new users each day, reaching the 400 million mark on April 24.

That makes Durov worth $10 billion to $20 billion, Novogratz guessed. If the TON blockchain ends up flaming out in court, they would likely either given equity in Telegram, or Durov could sell part of the company for the cash to pay them. 

Run the numbers. If every one of the 175 initial investors put up the same amount (which doesn’t seem particularly likely), that’s about $9.7 million each. At 72%, they’d each receive $7 million, a $2.7 million haircut. Taking Durov up on his offer would mean a $970,000 profit.

And the thing is, Judge Castel has made it pretty clear that Telegram is going to lose the case, and the investors will not receive those grams, or be allowed to resell them at a profit. Which was the point of the investment. 

SAFT is daft

At it’s core, this case and another one the SEC is pursuing, is a frontal assault on SAFT, which stands for simple agreement for future tokens. It’s a legal theory relied on by Durov and Ted Livingston, CEO of the Kik messaging service, whose kin token initial coin offering also relied on SAFT. 

The SAFT is pretty straightforward. It is basically a two-part sale to enable a blockchain developer to hold an initial coin offering, or ICO, while bypassing the long, complex, and expensive process of holding a public securities sale.

First, a blockchain developers holds what it agrees is an initial securities sales to “accredited investors”—basically wealthy individuals and companies—under a section of U.S. Securities law know as Regulation D. That allows the sale of securities to what the law presumes are savvy investors with far less effort and disclosure than a sale to the general public. That funds development of the blockchain.

The second part of a SAFT is the resale of those tokens to the general public when the blockchain finally launches, hopefully for a profit. By that time, the SAFT theory goes, the tokens are no longer securities purchased as an investment but utility tokens usable on that blockchain. 

In Telegram’s case the gram tokens were to be used for financial transactions by Telegram messaging service users. Essentially, it’s Facebook’s Libra project writ small—or smaller at any rate. With access to users of Facebook Messenger, WhatsApp, and Instagram, Libra would have a digital currency with 2.7 billion instant users. Telegram’s TON would “only” have 400 million. 

Just say no

Unfortunately for Durov and his investors, Judge Castel made pretty clear that he isn’t buying SAFT. 

“The Court finds that the SEC has shown a substantial likelihood of success in proving that the contracts and understandings at issue, including the sale of 2.9 billion Grams to 175 purchasers in exchange for $1.7 billion, are part of a larger scheme to distribute those Grams into a secondary public market,” Castel wrote in a March 24 ruling. “[T]he Court finds that, in the context of that scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement.”

Which is to say, illegal. And on March 30, Judge Castel refused Telegram’s request to start up the TON blockchain and allow the 70% of its initial 175 investors who are not U.S. citizens to sell their grams. Judge Castel ruled that there’s no practical way to stop grams from getting into American hands. 

Not worth a TON of trouble

While that would seem to doom Durov’s Telegram Open Network blockchain, Galaxy Digital’s Novogratz—who is not a TON investor—had another suggestion. Dump the blockchain and its gram tokens altogether and just enable Telegram users to transfer bitcoin and stablecoins on the messaging app.

 “We don’t need another blockchain,” Novogratz wrote. “We don’t need another crypto. They have an awesome community of messaging users. Turn them into consumers now.”