Telegram created ‘Grams’ which were claimed to be designed for users to spend on a global instant messaging app, powered by Blockchain technology and called Telegram Open Network (TON).  The intention was that Grams would have a finite supply, thus theoretically rising in value as more people used them on the network and as demand for the currency increased. According to a statement from Telegram, the intention was to offer “significant improvement upon previous platforms in terms of speed, usability and scalability.”

Telegram carried out two fundraisings - the first, in Q1 of 2018, attracted  81 investors putting in minimum of $20 million each and raised $850 million, at an average price of $0.38. In a filing to the Securities and Exchanges Commission (SEC) Telegram reported that it had carried out a second issue later in the year and had raised an additional $850 million from 94 investors, bringing the total amount to $1.7 billion. Telegram also added that it would possibly “pursue one or more subsequent offerings” beyond these first two sales. Of note, investors in the first round could use other Crypto currencies, such as Bitcoin or Ethereum, to buy Grams but in the second round one could subscribe for Gram tokens only in US dollars and Euros, at a price of $1.33. 

There were differences not only in price but also the ‘lock-up’ restrictions between the terms of the Purchase Agreements for investors in Telegram for the two rounds. Those in the first round were not permitted to sell their Grams immediately but had to wait 3 months, and then could only sell their Grams in 25% increments staggered over 18 months. On the other hand, the second set of investors did not have any restrictions and could sell their Grams as soon as they received them. However, in October 2018, the Security Exchange Commission (SEC) in the USA sued Telegram as it believed bank records would prove Telegram illegally sold tokens to resellers who were paid a commission on selling Gram tokens. Furthermore, Telegram had sold tokens after a March 2018 deadline.  

So, what is the value of Telegram? Unfortunately, valuing any cryptocurrency is difficult for main two reasons:

1. Cryptocurrencies are not ‘shares’ in a company but ‘representations’ of the value of assets within a network. Therefore, their viability is not based on generating a cash flow. Instead, it depends on the level of engagement from the community that supports it (e.g. users using the service, miners securing the network and, of course, the developers). It has been proposed that the value of a utility token, such as Gram, could be achieved by looking at the Current Utility Value (CUV) which is more fully explored by Rutam Bostashev in a paper looking at “The Next Step in Crypto asset Valuation” ;

2. Cryptocurrencies are a new and unexplored type of asset, with their application still moderately limited compared to fiat currencies. Almost all cryptocurrencies are in their infancy, with the oldest having been launched in January 2009. This means there are very small number of ‘use cases’ and a limited track record which could explain volatility or key drivers. This was true in 2018 and remains the case.

As with many ICOs it has been almost impossible to assess the real value of Grams. Telegram was mindful of the SEC regulations and its reliance on the Howey test in relation to ICOs, so had made it clear that investors were not actually buying equity in Telegram. However, Aton (one of the oldest investment companies in Russia, founded in 1991) 

has carried out a review of Gram tokens and estimated the value of Gram at between US$2.1 and $8.0 per token.

Essentially, as with any asset it is about how much someone else will pay and, despite not being officially listed on an exchange, an Over the Counter (OTC) market has developed trading Grams therefore giving an indication of what people are prepared to pay. However, those people trading Grams possibly need to be careful as, according to Coindesk, “Investors who bought into Telegram’s $1.7 billion offering in February and March of 2018 are not allowed to sell or pledge their tokens in any way before the launch. The original purchase agreement says that if an investor disposes of his future tokens before Telegram Open Network, or TON, is live, the allocation can be cancelled. In other words, there’s a risk that investors buying these tokens in secondary trades won’t ever get them”.

Furthermore, Telegram issued a statement saying, “Nobody can buy or sell Grams yet… First, it has come to our attention that certain websites appear to be offering Grams to the public. These websites sometimes refer to the offers as “token presales,” and some pretend to be affiliated with Telegram. As we've warned you on numerous occasions, these are NOT official Telegram websites, they have NO affiliation with Telegram, and NO Grams have been issued yet to anyone.” 

This surely raises the question if NO Grams have been issued yet to date, how will futures contracts be able to finally settle? According to BitForex, “All users who hold BitForex Grams futures contracts when they expire will be able to redeem the Grams’ physical assets 1:1 following the launch of the TON mainnet”. So, on one hand Telegram states it has NOT issued any Grams, and yet, “BitForex has entered into strategic cooperation with Telegram Open Network private token sale participants and currently has the right to use 1 million Telegram Open Network GRAM tokens”. To say the least, the rights of those who buy Grams via an OTC transaction is less than clear.

So what is the value of Telegram? Unfortunately valuing any crypto currency is difficult for a variety of reasons:

• A valuation based on its tangible assets, such as Fiat cash and Crypto holdings - after all, it did raise $1.7 billion in cash and Crypto. Presumably, while there have been expenses one would have thought the ‘cash pile’ would have been earning some interest (although as Duvo once said, “If you buy Euros, you do not own the EU”).Therefore, Gram holders, in theory, have no economic interest in Telegram’s assets!

• An alternative way to value Grams could be by looking at its intangible assets. According to SEC filings, Telegram has 300 million members and 200 million active monthly members. As a comparative, Pinterest, had 325 million active users at the end of 2019 and is currently valued at $11.6 billion. Thus, there is an argument that Telegram (if the SEC challenges are resolved) could be worth 2/3rds i.e.$7.65 billion, based the number of Telegram’s monthly users. However, Telegram sold the right to use Telegram Open Network (TON), not equity in Telegram. Simply because one owns Grams it does not mean there is an entitlement to any proceeds in the event of an IPO - should Telegram take this action! 

• The SEC remains in dispute with Telegram as it claims Grams are not a utility token, but they are a security  token. Since Telegram did not follow US security regulations, it is in breach. Until this matter is resolved it must surely reduce the value of Grams, as investors may need to have their money returned to them. It is interesting that a company called Base carried out an ICO which was backed by some very experienced institutional investors but, due to pressure from the SEC, the $130+ million Base raised was handed back to investors.

• A challenge could present itself if investors’ money is ordered be returned since Grams were issued largely as a result of swapping BTC/ETH for Grams. There may be disparity in price of these Cryptos compared to the price investors swapped into Grams initially - granted that Telegram has not sold these holdings! However, if Telegram did cash in its Crypto holdings of ETH and BTC and invest the proceeds into US 10-year Treasury bonds (earning 2.72% p.a.), Telegram would be earning approximately $3.85 million a month which, no doubt, helps pay the lawyers to tackle the SEC!

These two charts show the price of BTC and ETH since Oct 2018

As Telegram states: “Grams do NOT represent:

• Any equity or other ownership interest in Telegram or its affiliates;

• Any rights to dividends or other distribution rights from Telegram or its affiliates;

• Any governance rights in Telegram or its affiliates.”

Also, in the same statement Telegram adds that its “TON Wallet application is expected to be made available solely on a stand-alone basis and will not be integrated with the Telegram Messenger service”. Therefore, can one really value Grams based on Pintrest’s capitalisation. As indeed Grams may now have nothing to do with the Telegram messenger service that currently has 300 million users ?

Meanwhile, the SEC is further actively pursuing a number of ICOs, as can be seen from its site  (which is regularly updated). The SEC has fined Blockone $24 million for running an unregulated security, so it may not be a total disaster for Grams if Telegram is found to have broken SEC security rules! Blockone is the largest ICO to date, raising $4.2 billion from 25/6/2017 to 4/7/2018. Telegram raised $1.7 billion 5/10/2018 to 15/2/2019. However, there are concerns that Telegram is in potential breach of its offer, having reported, itself, that Telegram Open Network (TON) would go online by October 31st, 2019. Telegram had stated that all investors would get their money back, less expenses. This was also confirmed to Telegram community members in a document that Telegram released to “Telegram News”, re-iterating that were investors not able to trade their tokens by 31st, October 2019, their money would be returned. Interestingly, this deadline was extended to 30th, April 2020 and even more recently, Telegram has offered investors their money back. However, Gram tokens were trading on the OTC market $1.9 earlier this week, so why would the initial investors now give up potentially $80m profit each? (i.e. the initial investors that subscribed for $20 million Grams tokens at 38 cents, compared to $1.9 recent price!).

Finally, The Free TON community (an independent group of software developers, validators and users) has launched the “Free TON Blockchain” on 7th May, 2020 and stated that Telegram “can no longer be involved” in the project. No surprises then, that the value of Gram tokens on the OTC market has fallen 12% to $1.78. 

Is this to be SEC’s biggest ICO scalp which leads to the demise of Telegram’s $1.7 billion ICO?

Without doubt, Blockchain technology offers the financial services sector many advantages. It can help reduce costs, improve transparency, give greater data security and has the ability to create new products and services more relevant and appealing to younger clients (who are typically looking for access to real time information from their mobile phone while on the ‘go’). 

Total number of Fintech, Insurtech and Realtech start-ups worldwide by industry, as of October 2019

Source: Statista.com

While change needs to be embraced (and there are a host of Fintech firms globally trying to implement this change), the incumbents are unlikely to alter and jump on what some still see as just the latest ‘techy band wagon’. Let us take, for example, custody services offered by banks worldwide - a market that is dominated by only five players. If you are managing assets on behalf of an investor, in most jurisdictions it is a requirement to have the actual assets ‘looked after’, i.e. in the custody of a third party. However, the majority of traditional custody service providers currently do not offer custody of Digital Assets. Arguably this is one of the reasons why it is difficult for fund managers to buy and own Digital Assets, as their existing custody agents are not able to administer them. It also may explain why fund managers often get exposure to Crypto assets (e.g. Bitcoin) via futures traded on established market, such as the Chicago Board Option Exchange (CBOE), as traditional custody service providers are familiar with ‘looking after’ futures contracts but not Cryptos.

A company trying to fill this gap in the market is Custodiex, which has been established by Martin Gymer, an ex-banker who therefore has first-hand experience about what the banks need and currently offer. Gymer recently pronounced, “We know the world is digitising assets like crazy….  Bitcoins and alternative coins, currencies, commodities, documents, property, Intellectual Property, patents, trademarks, customer and business data, paintings, literally everything. At Custodiex we offer a hybrid concrete and cloud solution to look after these digital assets on behave of third parties.”

Custodians by Assets Under Custody

Source: The Asian Banker

The securities industry is certainly one area that is likely to benefit from using Blockchain technology. Enabling trades to be settled faster while providing military grade security helps to explain why possibly JP Morgan has developed Quroum. A Blockchain-powered security would enable dividends to be calculated, based on the number of hours a security had been held, and give real-time access to whom is the beneficial owner of an asset. It would be possible for different types of information to be shared with different parties or different divisions in the same organisation, thus maintaining greater confidentiality and offering enhanced security and privacy (which is impossible using paper-based records requiring masses of documents). At the same time the Blockchain technology would enable regulators to have on-line access to all the data and then, in turn (by using smart contracts), 

run exceptional reports to offer real insight to the internal risks and any systemic macro risks in the financial system:

Greater automation holds the promise of better risk control and more time spent on analysing risks, as opposed to checking documents. KPMG claims, “Clients using its Customer Risk Analytics, have reduced the time, effort, and cost of call transcription and analysis by as much as 80 percent”. Furthermore, Blockchain technology offers the potential to impact the payments sector eliminating may of the current intermediaries. It is possible that transactions between consumers could be approved automatically and digital assets could facilitate faster payments at lower fees. This is what Ripple is currently doing with Azimo which, itself, is targeting the Philippine remittance market (valued at over $34 billion p.a.). 

Blockchain technology can offer help institutions move closer to real-time transactions between financial institutions and each form will be operating of the same ledger which offer the promise of greater trust as assets can be tracked and trace as they move around the system. HSBC has found that by using Blockchain technology it can substantially reduce the cost of dealing in foreign exchange. Digital Assets, backed by traditional securities such as stocks, bonds, commodities, are obvious evolutions. However, the ability to create new alternative and uncorrelated assets could prove to be really interesting for investors. Such uncorrelated assets could be based on the monetisation of data, Intellectual Property, litigation financing, rental income from Real Estate or an asset backed by a sports star’s future earnings.