Toncoin: the secret story of Telegram's crypto resurrection

We're not going to lie, we didn't really see it coming (or rather coming back). The cryptocurrency project of Telegram, the encrypted messaging app of Russian origin, was supposed to have been nipped in the bud after a $1.7 billion ICO (cryptocurrency fundraising) deemed illegal by the US financial regulator.

That was in 2020.

But four years after the agreement between the SEC and Telegram put an end to the project, it has risen from the ashes, more or less independently of the company.

The token Toncoin currently tops the list of the sector's ten biggest capitalisations at nearly $16 billion, ahead of major projects such as Chainlink, Polygon and Uniswap. Toncoin is one of the sensations of 2024, with a rise of more than 180% since the start of the year.

While the history of the TON blockchain is still the subject of many mysteries, which we are going to lift the veil on via exclusive documents that The Big Whale has obtained, it is essential to go back to the beginning.

A partly disguised ICO to fund Telegram

What you need to understand about the genesis of Telegram's crypto is that it was initially conceived as a backdoor way to fund the messenger's business, which wasn't making any money until 2022. The problem was that this aspect had been concealed from the ICO investors, who thought they were only funding a blockchain, as some of them confirmed to us.

Telegram, which was founded in 2013, has historically been financed by the funds of its Russian founder Pavel Durov, most of whose fortune comes from the fruits of his first venture, VKontakte, the Russian equivalent of Facebook from which he was ousted by Moscow in 2014.

But as Telegram grew (900 million users today), it became increasingly urgent to generate revenue while its server costs exploded.

Pavel Durov initially refused to introduce advertising on his app (before going back on it at the end of 2021) and as early as 2017, when the cryptocurrency boom was in full swing, he came up with the idea of launching a blockchain called TON with a native cryptocurrency (the "gram") that would be used within the messaging service to offer financial services, similar to PayPal, but with borderless and decentralised operation.

On paper, the idea made sense and was in line with the dynamic of Facebook, which at the same time wanted to launch its Libra project, a kind of cryptocurrency available globally and integrated into its social ecosystem.

The "gram" conceived as a mass currency

To combat price volatility, Telegram proposed inventing an algorithmic reserve principle. This would be a kind of central bank based on an algorithm, responsible for buying back or selling grams. The new cryptocurrency would thus have an international, automated regulator, with no human intervention involved in the process.

"The gram was designed to be a mass currency used for consumption purposes," explained Pavel Durov on 15 January 2020 during a private interrogation conducted by the US regulator, the transcript of which The Big Whale has obtained.

He continued: "We hoped to build on the ideas of older decentralised networks such as Bitcoin and Ethereum, and significantly improve their speed, scalability and ease of use, so that consumers who suffer from the limitations of these networks could benefit from a more efficient service and achieve their goals in a more efficient and user-friendly way, so that, as a result, the resulting cryptocurrency could achieve wider adoption and be used in commerce and all sorts of applications for a wide range of purposes."

French billionaire Xavier Niel among investors

In January 2018, Telegram published the white paper of its project. A few weeks later, an ICO (Initial Coin Offering) was launched by the company. In just a few days, the operation raised $850 million from private investors (minimum ticket of $20 million). A second operation was launched in mid-February (minimum ticket of one million dollars), bringing the total to 1.7 billion dollars.

Prestigious venture capital funds took part in the operation, including Kleiner Perkins, Benchmark and Sequoia, three historic Silicon Valley structures. We are also able to confirm that Frenchmen Xavier Niel (founder and boss of Free) and Marc Simoncini (founder of Meetic) also participated.

Philippe Rodriguez, boss of Avolta Partners, a French private bank that had invested $15m on behalf of several clients, recalls: "I saw this as a great opportunity: with its global adoption and well-established network, Telegram could have succeeded where other blockchains had failed. We didn't realise until later that the funds had been used to finance Telegram and not just the project, but we were prepared to take the risk as it had so much potential."

The choice to target only investors with deep pockets (and not the general public, as was traditionally the case with ICOs at the time) is explained by the fact that some of them were expected to become the first validators of this network operating on proof-of-work, a consensus algorithm similar to that of Bitcoin and requiring significant computing power.

"We only admitted wealthy individuals and funds established in private placement because they were able to pay for the computing power required for the validation process, as, to my knowledge, the cost of renting or acquiring equipment for validation, although considerable for an average person, can be considered negligible compared to the amounts of funds invested by each of the investors," Pavel Durov justified to SEC investigators in 2020.

Philippe Rodriguez (Avolta Partners): "These were their conditions, take them or leave them"

According to these private hearings between the entrepreneur and the US financial watchdog, Telegram was to ensure the development of the infrastructure and decentralise the governance of the project when the token was launched. The company planned not to hold any tokens after launch, nevertheless 52% of the tokens issued at launch should have been under the governance of a foundation under Telegram's influence.

"We didn't have the opportunity to change a comma on the investment contract we signed with them," Philippe Rodriguez recalls. "Those were their conditions, take it or leave it, which is very rare when you invest such large sums," he points out.

But in October 2019, almost two years after the fundraising, it came as a shock to those involved in the project: the powerful SEC, the financial arm of the US government, announced that it was taking Telegram to court on the grounds that the operation constituted an issue of unregistered financial securities and that it fell within its jurisdiction because the company was targeting US investors.

A few months later, on 27 June 2020, the project was brought to a screeching halt. Telegram agreed to return the unused funds ($1.3 billion) to the investors, or repay them in full in return for a 10% bonus in the form of loans with a longer maturity. The company also agreed to pay $18.5 million and abandon the project.

"It all happened very quickly, we received the funds 15 days later, but what is embarrassing about this story is that the missing $400 million was mostly used to finance the Telegram company", regrets Philippe Rodriguez.

But what was to become of the infrastructure developed over nearly two years and whose initial tests had been conclusive? This is where things get very interesting and a fog thickens over the project.

Telegram's influence on the teams that took over the source code

"The Durov brothers then decided to put the project in open source, allowing anyone to use its source code and design their own blockchain based on the work done so far," explains Philippe Rodriguez.

A number of teams then entered the competition, including TON (which is the project we know today), but also "Free TON", which has since distanced itself from the original project.

TON is a blockchain developed by a foundation based in Zug (Switzerland) called The Open Network. The foundation is also responsible for developing the TON Space digital wallet, which was integrated into Telegram in September 2023. The latter is accessible to anyone residing outside the United States.

To date, the big question on everyone's mind is to what extent the Telegram company is involved in the current project, even though it had assured the SEC that it was ceasing to develop it...

"Even though the Durov brothers have publicly announced that they are withdrawing from the project in 2020, I still have a hunch that they exert some form of indirect influence in TON," blows Philippe Rodriguez. Telegram is still a very closed system, and it's hard to imagine a wallet being integrated into their application without direct involvement. "What is certain is that they will never comment on this aspect because it is not in their interest to do so", warns the banker.

We can only applaud the tour de force, because despite the SEC proceedings and the presumed halt to the initial project, TON's vision is ultimately very close to that carried by its initiators: to offer a crypto payment system uncorrelated from state currencies and available on a communication application of global amplitude.

Telegram succeeds where Facebook failed

In a way, TON is succeeding where Facebook failed, by managing to foster the emergence of a mass cryptocurrency without arousing the ire of states and regulators. "What the SEC criticised about the initial project was that it had sold illegal financial securities to American investors, but in the current version there is none of that," emphasises Philippe Rodriguez.

As evidence of its growing influence, since 19 April the TON blockchain has hosted a version of Tether's USDT stablecoin, the most widely circulated dollar-indexed cryptocurrency in the world (capitalisation of $112 billion). With USDT, it is now very easy to exchange dollars very easily within Telegram.

"TON has the potential to revolutionise payments around the world, combining the power of one of the most popular messaging apps, Telegram, with the world's most popular dollar stablecoin," Paolo Ardoino, Tether's boss, tells The Big Whale. "Telegram, with nearly one billion active users, and USDT, with over 300 million users worldwide, are perfectly suited to create a new payment and wealth management experience," he enthuses.

"The total value tied up in the TON ecosystem soared by $260 million just one month after our announcement, underlining the interest users see in a democratised, borderless financial system," adds Paolo Ardoino. "There is a clear demand for global commerce to adapt to new payment channels and we are eager to pave the way with TON," he notes.

What are the next steps now?

With a partner like Tether, Telegram has the potential to become an equivalent to WeChat, the powerful Chinese social app through which billions of dollars in payments flow every year. "What's happening right now is hyper-interesting, because despite its run-ins with the US authorities, Telegram will manage to realise its initial vision," concludes Philippe Rodriguez.

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This content is part of the complete dossier produced on the TON ecosystem

> Fundamental analysis of Toncoin (TON)

> Fundamental analysis of Notecoin (NOT)

> Video: Interview with Anthony Tsivarev, ecosystem director at the TON Foundation

> Video: Interview with Martin Masser, STONfi, the largest DEX of TON

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Watch the interview with Anthony Tsivarev, director of ecosystem development for the TON Foundation: