Targeting a record-setting $2-billion initial coin offering (ICO) by the end of March, encrypted messaging app Telegram has encountered headwinds in the form of a brief Apple Store ban and broad skepticism from veteran crypto investors.

Despite adverse news reports about Telegram being a go-to messaging service for childabuse content – the inappropriate material that led to its Apple suspension – and savage Medium-post takedowns that cast aspersions on its technology, some venture capital stalwarts are still investing. 

Kleiner Perkins Caufield & Byers, Benchmark and Sequoia Capital have each committed $20 million to the Dubai-based app’s token sale, according to the Financial Times, which also called Telegram the “social medium of choice for online cryptocurrency communities.” None of these VCs responded to ThirtyK’s request for comment.

Telegram did not immediately respond to ThirtyK’s request for comment.

Institutional appetite for “grams,” Telegram’s ICO token, is likely driven by the app’s established audience of 170-million monthly active users (MAU), according to the white paper. The platform also expects its user base to hit 200 million by the end of the first quarter of 2018. According to CoinDesk’s ICO tracker, Telegram has already raised $850 million from investors.

While most ICOs are designed to plug and play with the ethereum (ETH) network, Telegram aspires to create its own third-generation blockchain through the Telegram Open Network, or TON. Big investors are betting that TON could become the next WeChat, a Chinese messaging app that has evolved into the country’s default payment and ecommerce service, with roughly a billion MAU

SAFT Contracts

But Silicon Valley demand may also be distorted by the animal spirits of the ICO craze, where crypto startups are increasingly spurning VC financing in favor of less dilutive simple agreement for future token (SAFT) contracts with crowdsourced investors.

Highlighting this trend is the $5 billion raised by blockchain companies via ICO last year, which is five times the amount they raised through equity financing, according to market intelligence firm CB Insights. Thus, Silicon Valley’s participation in TON might have more to do with fear of missing out than diligent technical assessment.

Highlighting this point in Charles Noyes, the Pantera Capital crypto-hedge fund analyst who wrote the widely circulated Medium post, “$600 Million TONs of Crap”, which argues that TON raises too many red flags. According to Noyes, the main problem is that the app has not been transparent about its encryption protocol, which erodes confidence in TON’s security.

“This is the Telegram approach to doing things. It is incompatible with blockchain technology,” writes Noyes. “TON’s 132-page whitepaper says nothing substantial about the hard parts of designing a decentralized protocol. It is essentially a wishlist of things they want to have, and how it will work assuming that their wish list doesn’t crash and burn.”

It also doesn’t help that the International Consortium of Investigative Journalists (ICIJ) openly endorse Telegram competitor Signal as the “clear favorite for secure voice calls and messaging between journalists, their editors, and sometimes their civil servant sources.”

Flipping Tokens

Regardless, Quartz recently reported that a secondary market has emerged for gram subscriptions, where early private investors are flipping their tokens to accredited investors ahead of the public sale for twice the sum they initially paid.

One expert who has been tracking secondary TON syndicates is Toby Lewis, the chief executive officer and founder of Novum Insights, a U.K.-based analytics firm that covers Fourth Industrial Revolution technologies.

Evaluating the broader ICO, Lewis told ThirtyK, “I respect the boldness of the transaction as it provides the resources and system to potentially create the WeChat of the West.”

But Lewis also concedes that the “crypto community are largely negative on the deal. They argue it is too big, has too long a lockup and lacks protections for token holders.”

Founded by Russian tech-entrepreneur brothers Pavel and Nikolai Durov in 2013, who also created Russia’s largest social network, VKontakte (VK), Telegram was conceived as a firewall against government oppression.

The Durov brothers have alleged they were muscled out of VK by the Kremlin after refusing to censor, and share with government officials, information about opposition activists. This prompted the brothers to leave Russia in 2014 and relocate Telegram’s headquarters to Dubai.

As TON’s ambitious ICO draws closer, Lewis strikes an optimistic tone, saying “the token sale is going to make this platform a real experiment, which to me is exciting.”

Tim Lloyd
Tim Lloyd is a financial journalist and AML subject matter expert, specializing in regulatory technology, blockchain ecosystems, information security, and risk. He covers fintech innovation and the growing symbiosis between money laundering and cybercrime. His work has appeared in the Financial Times, Wall Street Journal and VentureBeat, among other publications.