Messaging app Telegram is currently front page news following the arrest in France of its CEO Pavel Durov. Last week the French authorities charged him with allegedly enabling illegal transactions on the platform, including child pornography and money laundering. On Friday the Financial Times (FT) published an article showoing the company’s dependency on cryptocurrency revenues. We also highlight a couple of oddities.
During 2023 Telegram had $342 million in revenues, made an operating loss of $108 million and a bigger loss of $259 million after hefty finance costs – the company has raised more than $2.3 billion in convertible bonds. However, an $86 million profit in revaluing digital assets enabled the reduction of that loss.
Telegram developed the TON blockchain in 2019 and raised $1.7 billion in an ICO. After the SEC sued the company over the ICO, Telegram settled, returning $1.2 billion of the funds and paying a $18.5 million penalty. The network subsequently launched as the open source TON network, run by a foundation independent from Telegram and without an ICO.
Last September Telegram integrated the TON network into the messaging app, which has proven hugely popular. Since then, the Toncoin’s market capitalization rocketed from $2 billion to $25 billion in April and it entered the top 10 in crypto rankings. It was worth around $17 billion shortly before Durov’s arrest and has lost roughly a quarter of its value since.
Crypto in Telegram’s accounts
According to the FT, $130 million of its revenues are from the newly integrated crypto wallet, with an additional $17.8 million from collectible sales. These sales make up 43% of revenues. The wallet is a new revenue line, but collectible sales were $91.7 million the previous year and mainly relates to the sale of usernames and virtual phone numbers. The $130 million was a payment in Toncoin by the TON Foundation for providing an application interface to integrate TON with the wallet.
Telegram’s balance sheet shows a digital asset balance of $399 million. Oddly it splits the valuations into Level 1 ($142m) and Level 3 ($257m). From an accounting perspective, Level 1 is a valuation based on exchange prices. However, Level 3 valuations are based on market inputs that are not observable. Given Toncoin is widely traded, this split seems odd. We wondered whether the Level 3 item was perhaps the collectibles, but it shows a round sum $180 million acquired through sales, implying this is the Toncoin used to pay for the API – $130 million recognized in 2023, and $50 million later.
Another observation is that it would have been harder to put these digital assets on the balance sheet if the TON network were part of Telegram. Generally it’s not considered acceptable to count crypto tokens issued by the same entity on the balance sheet because the can be significant and could go to zero – like happened with FTX’s coin.
Durov’s arrest
Meanwhile, the debate around Durov’s arrest will continue. In another article, the FT said the arrest is not about free speech. It pointed out that companies should be responsible for trying to prevent criminal activities on the platform. Others have highlighted that Telegram is not encrypted by default, and group chats are never encrypted. Although it supports one-to-one encrypted messaging, which is relatively hard to access.
One issue that concerns people is the French authorities’ inclusion of a charge against Durov of supplying cryptography “not exclusively ensuring functions (of) authentication or integrity control without prior declaration.” It remains to be seen what exactly that means.
