After Telegram’s Lost Battle with SEC, TON Launched Now Under Slightly Different Name

News and Analysis

TON developers, major PoS validators, and community enthusiasts have announced the launch of Free TON powered by the native token TON Crystal in a declaration.

The protocol was developed by Dr. Nikolai Durov together with the Telegram team. As the latter was struggling to win a court case against the SEC, which led to the failure to launch the project on schedule, it seems that the community has stepped in.

Among other participants, TON Labs and are featured as the launch parties.

In this piece, we share the details about the launch of Free TON and recall the troubled story of its predecessor going back to a secretive ICO in early 2018.

The Declaration of Independence and Launch Phases

The signees of the declaration acknowledged the contribution of the Telegram team and Dr. Durov personally and invited them to participate in the further development of the network, however, the participants refused to comply with the SEC or U.S. court rulings believing that the network, when launched, will benefit everybody.

“We are grateful for Nikolai [Durov’s] to the TON protocol and wish him to continue developing it as part of a wider community effort,” the declaration reads.

Free TON will be launched in several phases for the sake of ensuring the gradual development of the protocol involving the initial developers and mass adoption. The signees claimed they will ensure maximum possible decentralization in governance, software development, and validation.

“Since we believe in freedom of speech, in information sharing, and in free software, we have decided to give the power back to the community. The TON protocol represents an opportunity to create a massively scalable network benefiting hundreds of millions of people. Centered around smart contracts with easy to use tools for developers and users, it can promote free trade, equal opportunities, censorship resistance, and cooperation during an unprecedented threat from a pandemic and an economic crisis,” the declaration reads.

Depicting the development roadmap, the signees seemed to use an aggressive stance with numerous pop culture references.

Phase one is dubbed “Raging Bull” and will feature manual changes in the network configuration and SMV contracts. The code will feature a decentralization time bomb. It will count down the time to the moment when the developers lose any ability to change the configuration.

Phase two dubbed “Rumble Fish” will commence when the decentralization bomb activates. The network will then be controlled by validators.

Phase three is the modestly named “Fight Club.” By then, the network will have enough validators and pools, and TON will have become fully decentralized. SVM voting will become automatic, and smart contracts will continuously distribute coins among new users.

Coins from the genesis block will be distributed among so-called Giver contracts not involved in voting or staking. Their sole purpose is automatic distribution. They will have 85% of all coins to incentivize first users and partners to promote TON among their user base.

All decisions on coin distribution via Giver contracts will be made through voting by TON holders.

Two-Year Long Obstacle Course for Telegram Open Network

Free TON is the community-driven successor to Telegram Open Network, a blockchain network founded by Telegram’s Durov brothers Pavel and Nikolai.

As envisioned by the developers, Telegram Open Network would have been a fast, secure, and scalable multi-blockchain platform friendly to both users and service providers. The platform design documents described the following:

  • a built-in proxy solution,
  • distributed file storage system,
  • digital passports,
  • its own DNS and websites similar to the conventional Web,
  • a payment layer supporting multiple cryptocurrencies, and
  • the native token called Gram for instant payments.

In addition to that, the platform would have allowed integration with this-party services and messaging applications, creating an ecosystem that has seemingly everything, but better. However, the project was up for a rough ride.

Back in late 2017, rumors about a mysterious ICO planned by Telegram began circulating all around the crypto-industry. In January 2018, the first details about the effort appeared on the internet revealing the name Telegram Open Network and suggesting the potential target of raising up to $500 million over pre-ICO by selling contracts allowing investors to receive Gram tokens upon launch.

Shortly after, TechCrunch reported that the offering raised $850 million because of the high demand from the investors. Later in February, the involved investors received a letter announcing another private pre-ICO round speculated to bring as much money. The estimated total amount to be raised reached $1.6 billion.

Lacking official comments from Telegram’s Pavel Durov and fed mostly by rumors and leaked details, the hype around TON kept going. The news about the first expected deadline for the first deliveries of Gram tokens appeared by the end of August 2019. Reportedly, the company promised to get the tokens out by October 31st, 2019, or return the investments.

The deadline and the whole idea of TON faced certain criticism.

“I don’t see how on earth Telegram can possibly get something compliant with regulators in place by the end of October,” cryptocurrency publicist David Geread wrote in July 2019.

Indeed, the October deadline wasn’t to be met. On October 11th, 2019, in a press release, the SEC said that it has “filed an emergency action and obtained temporary restraining order” against Telegram Group Inc. and its subsidiary TON Issuer Inc. According to the SEC, 2.9 billion Gram tokens were sold to 171 initial buyers, 39 of which were “U.S. purchasers.” The Commission also noted that after the proposed token delivery on October 31st, the initial investors would be able to sell Grams into U.S. markets.

“Our emergency action today is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold. We allege that the defendants have failed to provide investors with information regarding Grams and Telegram’s business operations, financial condition, risk factors, and management that the securities laws require,” Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement, said in the press release.

The SEC argued that Gram tokens are securities and the issuers haven’t registered the sale properly, which would constitute a violation of the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The sides were to meet in court on October 24th, 2019.

On October 17th, Telegram responded to the SEC arguing that Gram tokens aren’t securities and asked the court to deny the regulator’s injunction. The Commission fired back, saying that without the injunction Telegram would continue to violate the rules forcing the regulator to seek another restraining order. In addition, the hearing was rescheduled for the 18th and 19th of February, 2020. Effectively, the Commission ordered the defendants “not to offer, sell, deliver, or distribute” Gram tokens until the conclusion of the court hearing.

Later in October, TON investors received a letter suggesting to move the launch deadline to April 30th, 2020. The investors agreed and the deadline shifted.

On February 20th, 2020, after the hearing, the restraining order obtained earlier by the SEC has been extended until there is a further judgment by the court, which was expected to come before April 30th. On March 24th, the judge ordered against the April launch making the fate of the project and the investors’ money yet more uncertain.

Telegram lawyers promptly asked to clarify if the order applies only to U.S. investors, which would mean that they can still sell Gram tokens outside the States. Unconvinced that the tokens won’t find their way to the U.S. investors through secondary markets, the court maintained that the sales to non-U.S. persons are also prohibited. Telegram appealed the court ruling on March 25th.

Without a chance to launch TON by the April 30th deadline, the developers confirmed that there will be no token issuance and offered investors two options: take 72% of the money or wait until April 30th, 2021, and get 110% in Gram or another cryptocurrency.

Shortly thereafter, on May 4th, TON investors in the U.S. were informed that they can only take the 72% refund and won’t be allowed to get tokens in 2021. Non-U.S. investors then received a letter saying that there will be no payment in Grams or any other cryptocurrency whatsoever.

According to ForkLog sources, three days prior to the deadline, main TON validators including TON Labs and stated they will launch Telegram Open Network themselves if the team fails to do so.

Implications of Old TON Case and Challenges Lying Before Free TON

The opposition of the SEC and the unfavorable court rulings highlight substantial challenges for all crypto-projects that raised or aimed to raise funds via a private sale of forward contracts for tokens, which implies that parties agree to trade an asset at a set price and date in the future.

In particular, the fact that the court deemed Gram tokens securities is problematic. When setting up the token offering, Telegram was aware of the potential regulatory issues, which is why they were selling purchase agreements, not tokens themselves, and all the buyers were sophisticated investors, so there was no need to register a securities offering.

“Telegram has always treated the purchase agreements as investment contracts (and thus securities), but that does not mean the underlying Grams themselves, which do not exist yet and will be used, bought and sold by the public following the launch of the TON blockchain, are also ‘securities’,” the company argued

Yet, the court was confident that TON investors were expecting to make a profit on Grams upon TON launch and that profit would depend on the actions of Telegram. This makes Grams securities according to the Howey Test, which states that a security is “a contract, transaction or scheme whereby 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.”

One of the possible reasons behind the original declaration and the launch of Free TON in spite of the SEC’s pronounced displeasure with the original concept is that regulatory attempts to put innovative solutions into outdated templates of the past are still an ongoing battle. Much like the counterattacks of the crypto-industry that we probably see now.

Now, Free TON is aiming to reach the goals set by the old TON, but in their own way. Whether it will be acceptable for regulators or induce another litigation hell-storm remains to be seen.

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