How Will the Largest Financial Regulator and Durov’s Blockchain Network Confrontation End?
Telegram Open Network (TON) blockchain and Gram cryptocurrency had to launch in the Fall of 2019, but it still didn’t happen. TON has been held up in a many-month court battle after the U.S. Securities & Exchange Commission (SEC) claimed that Telegram failed to properly register its tokens as a security, rather than a commodity.
Half a year later, the case set to wrap up. The crypto world has some strong opinions about just what does this case mean, and what is essential. The decision in the Gram’s case could set a powerful precedent, according to which many projects that raised funds during slightly modified ICOs can also become the objects of the SEC’s attention. That may require them to pay fines or even make full refunds to investors. So let’s look at how this story went on.
💭 What is TON, and why did it interest investors so much?
First, TON was not created from scratch by unknown developers. The TON blockchain network arrived as a unique project that already had its community — a huge community — even before it was launched. Recently, in April 2020, Telegram co-founder Pavel Durov officially announced that the number of users registered in the messenger had exceeded 400 million. A fabulous figure! Launch of the TON network means that its internal cryptocurrency Gram would automatically rank among the most successful cryptocurrencies.
The number of users registered in the Telegram had exceeded 400 million in April 2020.
The presence of a vast user base was not the only thing that made TON different from other blockchain projects: transactions in the network were set to be many times higher than what its predecessors could ever offer. TON’s bandwidth should count millions of transactions per second, so the network could potentially compete with such giants as Visa and Mastercard.
But these were not all the TON’s advantages. In general, the network could be called an enormous Supercomputer, or rather a SuperServer, on which a large number of services could simultaneously work. Here are some of them.
TON Services, which allow one to create decentralized applications for the TON ecosystem.
TON Payments system designed for high loads and performing millions of micropayments simultaneously.
TON Messages, a system that allows not only human communication but also algorithmic one.
TON Storage, a hybrid file storage system that combines centralized and decentralized storage methods.
TON Virtual Machine, which is responsible for the correct seller/buyer contract execution.
TON Validators, which consists of network users confirming transactions.
And many other features, thanks to which TON can be called not even Ethereum 2.0, but the Next Internet (or Web 3.0, the Internet of the future, where there is no centralization, cross-border transfers take seconds, and people control their data).
💭 How did the Telegram Open Network history went on?
In January 2018, Telegram announced its new ambitious plan to become something much bigger than just a platform for authors’ channels and cool stickers. The news said that the Telegram team was going to create its cryptocurrency and wallet within the messenger, which users will be able to buy and sell services and goods inside a platform called Telegram Open Network.
In January 2018, Telegram announced a launch of cryptocurrency and wallet within the messenger that called Telegram Open Network (TON).
A month later, the rumors received official confirmation, and Telegram held two closed rounds of financing, in which the number of investors was three times higher than it was required. Investors were selected personally, and random people were not included in the list. According to rumors, Durov tried to prevent the possible destabilization of the Gram token in advance. Wealthy investors should not have rushed to sell the network coins immediately after launch. However, the corresponding clause was also in their contract with Telegram.
In March 2018, Telegram reported $ 1.7 billion raisings, promising to launch the blockchain platform by October 31, 2019. The SEC then did not comment on what happened, but a year and a half later, on October 12, 2019, 19 days before the launch, it suddenly sued Telegram.
💭 What claims does the SEC make to Durov’s project?
The United States Securities and Exchange Commission (SEC) is a kind of prosecutor in the world of finance. Its purpose is to ensure that U.S. laws are enforced in US-related markets, and as financial markets around the world are more or less tied to the U.S., the SEC is the prosecutor for the entire financial world. Nobody in a sober mind and solid memory wants to go against the most potent regulator in the world, at least because American investors bring up to 80% money to crypto projects around the world, and at most because Apple and Google are American companies. If the watchdog tells them to remove a certain application from their stores, they will be required to comply.
The U.S. Securities and Exchange Commission is currently fighting to have Telegram’s cryptocurrency Gram classified as a security rather than a commodity like Bitcoin. The SEC believes that the project tokens were sold to investors with the promise of profit in the future, and the profitability was proportional to the number of tokens purchased. From this, the Commission concludes that Gram is security. Telegram disagrees positing that like other cryptocurrencies, Gram is a commodity.
The TON defense puts forward its counterargument: Gram tokens are intended only for functioning within the network, and no agreements have been made with exchanges about the listing of the token. Gram was not intended as a speculation tool, and it is the unit of account of the TON network.
As the SEC has already started in the past, commodities are goods which value is determined by free-market supply and demand — clothes, food, cars, electronics items that generate revenue from their direct sale and are exchangeable for goods. Similar type currencies, from the dollar to the yuan, are also classified as commodities. Securities are assets whose value is not inherent but rather representative. Stocks are a great example, an investment in a company that entitles you to a share of their profits or at the moment losses. The legal precedent in the U.S. defines security as when a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.
Because Telegram raised a bunch of money from private investors, Gram starts to look a lot less like a digital dollar and a lot more like unofficial Telegram stocks, which the company did not properly register. But what’s key to note is the difference between the investment contracts and the tokens themselves. The pre-launch investment contracts are certainly securities capital for the third party to turn into some sort of profitable enterprise.
The tokens, though, are undoubtedly a commodity given the nature of cryptocurrency. Once the switch is flipped on Telegram’s blockchain, Gram begins to be traded like any other consumer good in a free market. The best way to describe this is that the investors agreed to fund the construction of a marketplace.
On March 25, 2020, the court of the Southern District of New York made a preliminary decision that the project’s cryptocurrency is a security, and Gram tokens should not be given to investors.
When TON clarified whether the decision only applies to American citizens, the SEC responded that the decision applies to ALL project’s investors.
When the SEC banned TON a few days before its launch, Durov agreed with investors that the launch would be postponed to April 30, 2020. After the preliminary court decision, some of TON’s investors declared that they are ready to withdraw from the project and return their investments. They believe that TON will not be launched until the end of April, which means that under the agreement, Durov will have to give investors 72% of the raised funds.
💭 TON offered investors a money-back plan
Few days before the deadline for delivery of Gram tokens to investors, TON announced a money-back plan to U.S. investors in case of loss of court. They suggested two paths. In the first case, TON offers to return 72% of investments — the same volume of money that they got from American investors. In the second offer, they will return 110% of investments till April 30, 2021 (+53% up to the money investors could get today).
If the launch of Gram is not permitted until April 30, 2021, the company proposes to pay off the debt from the proceeds from the sale of the Telegram’s capital. With the enormous audience that increases by 1.5 million daily, Telegram expects to exceed the total amount of its potential debt several times. TON asked investors to respond to their offer by the end of this week.
How will the SEC react? It is unlikely to like it, and with this outcome of events, we expect further litigation.
We are following the situation and will keep you updated on key events related to TON.
