T Skevington and M Bacina
Telegram TON blockchain crushed under weight of SEC litigation
Telegram CEO and founder Pavel Durov has announced that the Telegram Open Network (TON) project is being discontinued, following Telegram's defeat in the New York District Court over the grant of a preliminary injunction preventing Telegram from issuing its GRAM tokens. Fittingly, the announcement was made on Durov's public Telegram channel, with further details provided in a blog post.
In the post, Durov explains that the decision is primarily due to the US Securities Exchange Commission successfully obtaining the grant of a preliminary injunction preventing Telegram from issuing its GRAM tokens. Durov attempted to explain the court's reasoning in granting the injunction with a (somewhat forced) analogy:
Imagine that several people put their money together to build a gold mine – and to later split the gold that comes out of it. Then a judge comes and tells the mine builders: 'Many people invested in the gold mine because they were looking for profits. And they didn't want that gold for themselves, they wanted to sell it to other people. Because of this, you are not allowed to give them the gold.'
Of course, this doesn't quite capture the full reasoning of Judge Castel, who agreed with the SEC that the combination of Gram Purchase Agreements, subsequent planned distribution of GRAMs to the initial purchasers, and the probable public distribution of the GRAMS thereafter constituted a “disguised public distribution” of securities in the US without a registration statement. The broader public policy reasons for why financial securities legislation and consumer protection legislation exists, is to protect consumers from misleading statements, poor disclosure and miscellaneous hare-brained schemes.
Using Durov's example above, what would happen if the investors were promised a gold mine, but it turns out the money invested was actually used to build a salt mine, or something completely different. Understandably, the investors might want some recourse.
Despite this, Durov makes a good point that the court's decision to grant the injunction, and the subsequent clarification of its intended scope, has broad extra-territorial effect. Functionally, Durov suggests that this means that "countries [other than the US] do not have full sovereignty over what to allow on their territory".
Durov also warns investors and readers against projects using the TON or Telegram names to spruik their own projects, or projects build off the technology which was to be used for TON. Durov makes it clear that:
No present or past member of our team is involved with any of these projects. While networks based on the technology we built for TON may appear, we won’t have any affiliation with them and are unlikely to ever support them in any way
The announcement does not refer to Telegram's recent offer of refunds to its early SAFT token purchasers, discussed in more detail here. The source code for the TON Blockchain is available on GitHub and for now the testnet is still documented online. The code will remain available for community development but without the reach of Telegram behind the project, or a dramatic retooling to incentivise nodes, it seems unlikely it will gain traction, even if it is a better network than Ethereum or Bitcoin.
The case continues, but the discontinuance of the TON network and offers of refunds will be interpreted as Telegram throwing in the towel on its battle with the SEC>