If the dollar amount weren’t enough to get your attention, consider the ambition behind it: Telegram is promising investors who buy into its home-grown cryptocurrency that it will solve some of the blockchain world’s thorniest problems.
Telegram is a messaging service known for its encryption. It is a popular application — more than 100 million users — but not nearly as widely used as WhatsApp, Facebook messenger, or China’s WeChat.
Why then is it raising billions of dollars through a vehicle called an Initial Coin Offering, or ICO?
First, a definition. An ICO is, basically, an unregulated crowdfunding campaign. In exchange for future cryptocurrency — coins — people provide real money or currently used cryptocurrencies.
By raising money through an open, unregulated process, an ICO allows a startup to bypass the traditional venture capital or debt financing systems. Rather than investor due diligence, an ICO follows the release of a technical white paper describing the company’s underlying technology. Here’s the Telegram white paper.
While ICOs are relatively new, they have generated serious capital. Filecoin raised $250 million in its ICO. Tezos — which describes itself as “a new digital commonwealth” — raised $230 million. Several others topped $100 million.
MIT professor Christian Catalini is skeptical. He says they lack details on distribution, decision-making, and overall process control. Even the Wolf of Wall Street, someone who would know, is calling ICOs the biggest scam ever.
Like most things in modern technology, ICOs have hardcore supporters, mostly from the technology community. The American SEC is not one of them: “Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams.”
Some of Silicon Valley’s most respected investors — Kleiner, Benchmark, and Sequoia — are looking to test that hypothesis.