a crypto firm with a sideline in messaging

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The arrest of Pavel Durov in France for failing to police criminal content on Telegram, the Russian-born billionaire’s messaging app, has sparked intense debate about the limits of free speech and the responsibilities of big tech firms to moderate their platforms .

Financially, however, cryptocurrency matters as much to Telegram’s bottom line as messages.

FT Alphaville got hold of the private company’s 2023 financials, which show that crypto trading provides a large portion of its revenue.

Telegram Group, which is incorporated in the British Virgin Islands and has one of its main operating subsidiaries in the United Arab Emirates, posted revenue of $342.5 million last year, with a significant operating loss of $108 million. Here is the PnL statement, signed by Durov and given a clean bill of health by PwC’s Dubai branch in April:

Eagle-eyed readers may have already noticed the “digital asset revaluation gain” lines, of which a modest $500,000 was booked through PnL and a more substantial $86 million through other global income.

As for Telegram’s revenue breakdown, the line items “integrated wallet” and “sale of collectibles” will also probably trigger the spidey sense of any crypto-aware reader:

Combined, the two line items account for over 40% of Telegram’s revenue.

You may have also noticed that the so-called “integrated wallet” is a new line of business for Durov’s company. As the accounts also explain:

During the year ended 31 December 2023, the Group started generating revenue from enabling access to the integrated wallet (Note 13). The integrated wallet is a software program that allows users to store, send, receive and trade crypto assets.

Telegram provides additional information on what digital assets, collectibles sales, and its integrated wallet mean to its business here:

Digital assets

The Group sells various collectibles and provides integrated wallet services in exchange for non-cash consideration in the form of Toncoins (digital assets), which are accounted for in accordance with IAS 38 — Intangible assets.

These digital assets are initially recorded at cost and are subsequently measured under the revaluation model at fair value less any accumulated impairment losses at each reporting date, given the presence of an active market for Toncoin. Any movement in fair value above cost is recorded through other comprehensive income in a separate reserve called “Revaluation surplus” in equity, while any movement in fair value below cost is first offset against existing credit balances in surplus from the revaluation, any excess over this balance being recorded through profit or loss.

The Group holds these digital assets on its own account for investment purposes (ie, capital appreciation) over long periods of time, with subsequent sales made at management’s discretion when market conditions are favorable. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in profit or loss for the year in which the asset is derecognised. Upon derecognition, the associated amounts recognized in Revaluation Surplus are transferred to Retained Earnings.

And here:

Revenue from the sale of collectibles. The group sells various collectibles (usernames, virtual phone numbers) to its users. The related revenue is recognized at a time when the collectible is assigned to the user. The group also allows the sale of collectibles between users and receives a fee for facilitating the sale.

Toncoins (digital assets), a non-cash consideration is accepted as consideration for this type of sale. Toncoins are measured and recognized at fair value when the Group fulfills its performance obligation: assigning the collectible to the user or facilitating the sale between users. The Group determines the fair value of digital assets based on quoted prices on active exchanges.

Integrated wallet. The integrated wallet is a software program that allows users to store, send, receive and trade crypto assets. During the year ended 31 December 2023, the Group recognized revenues from integrated wallet integration at the time of providing the API to The Open Network Foundation, enabling the integration of the integrated wallet into the Telegram application and from providing continuous access to Telegram to users of the integrated wallet in the menus inside the Telegram application, exclusively, during the period in which the service was provided. The Group normally provides services related to the integrated wallet on a prepaid basis. There is no financing component, because the services are provided in a period of less than 12 months from the payment.

Toncoins (digital assets), a non-cash consideration is accepted as consideration for this type of sale. Toncoins are measured and recognized at fair value when the Group receives the consideration.

The TON blockchain that underpins Toncoins was originally developed in-house at Telegram, attracting backers that included prominent wealthy Russians. It is now being developed independently of the company by an open-source community, however, after the project ran into regulatory issues in the US.

Returning to the balance sheet, digital assets represent a large part of Telegram’s assets. Valued at nearly $400 million, the tokens are much larger than cash and its cash equivalents:

Telegram further details last year’s growth in its crypto holdings here:

Elsewhere, in the related party transactions section of the accounts (one of FTAV’s favorite sections in any set of financial documents), we learn that in addition to purchasing $64 million in Telegram convertible bonds last year, Durov also purchased $300,000 worth of Telegram Premium subscriptions for a gift, paying the company in Toncoin:

Needless to say, Toncoin traders did not ignore the news of Durov’s arrest. Price chart provided by CoinMarketCap:

Helpfully for Telegram, the accounts’ events-after-reporting-date section shows that it sold much of its Toncoin before the price crash:

While Telegram is 100% owned by Durov, the company has raised $2.3 billion in convertible bonds from top investors such as sovereign wealth funds, hedge funds and technology-focused investors.

Even leaving aside the heavy reliance on crypto and substantial debt, one might question whether a business that had to eat over $450 million in operating expenses to generate $342.5 million in revenue is worth the valuation of “30 billion dollars more” that Durov offered him. FT earlier this year.

When it comes to the arrest of its founder, however, Telegram convertible bond investors who read the accounts correctly can’t say they weren’t warned:

Since its inception, the Group has been firmly committed to guaranteeing the privacy of Telegram users. The group’s core value of user privacy has not prevented Telegram from actively engaging in efforts and technical solutions to combat abusive, malicious or violent online content. The group’s core values ​​have led to Telegram’s popularity among its users. However, the Group’s operations may be affected by legal and regulatory frameworks in different countries, which are subject to frequent changes and different interpretations.