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

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

FT Alphaville got its hands on the privately held company’s 2023 financials, which show crypto transactions providing a big chunk 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, booked $342.5mn of revenue last year on a hefty operating loss of $108mn. Here’s 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 spotted the “gain on revaluation of digital assets” lines, of which a modest $500,000 was booked through the PnL and a more substantial $86mn through other comprehensive income.

Turning to the breakdown of Telegram’s revenue, the “integrated wallet” and “sale of collectibles” line items will also likely trigger the spidey-sense of any crypto-conscious reader:

Combined, the two line items make up over 40 per cent of Telegram’s revenues.

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

During the year ended 31 December 2023, the Group started generating revenues 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 gives further disclosure on what digital assets, collectible sales and its integrated wallet mean for its business, here:

Digital assets

The Group sells different collectibles and provides Integrated wallet services in exchange for non-cash consideration in the form of Toncoins (digital assets) which are accounted for under 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 considering the presence of an active market for the Toncoin. Any fair value movements above cost are recorded through other comprehensive income in a separate reserve called ‘Revaluation surplus’ within equity while any fair value movements below cost are first offset against existing credit balances under the revaluation surplus with any excess over and above this balance being recorded through profit or loss.

The Group holds these digital assets for its own account for investment purposes (that is, capital appreciation) over extended periods of time with subsequent sales made at management’s discretion when the market conditions are favourable. Gains and losses on disposals are determined by comparing the proceeds with the Carrying amount and are recognised in profit or loss for the year when the asset is derecognised. At the time of derecognition, the associated amounts recognised in the Revaluation surplus are transferred to Retained earnings.

And here:

Revenue from the sale of collectibles. The Group sells different collectibles (usernames, virtual phone numbers) to its users. The related revenue is recognised at a point in time when the collectible is assigned to the user. The Group also enables the sale of collectibles between users and receives the 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 recognised at fair value at the time of the Group fulfilling its performance obligation: assigning the collectible to the user or facilitating the sale between users. The Group determines the fair value of the digital assets based on quoted prices on the 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 recognised revenue from the integration of the Integrated wallet at the time of the provision of the application programming interface to The Open Network Foundation enabling Integrated wallet’s integration into Telegram App, and from providing continuous access of Telegram users to the Integrated wallet from menus inside the Telegram App on an exclusive basis over the term when the service has been provided. The Group normally provides services related to the Integrated wallet on a prepayment basis. There is no financing component, because the services are rendered within a period less than 12 months from payment.

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

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

Turning to the balance sheet, digital assets make up a big chunk of Telegram’s assets. Valued at nearly $400mn, tokens are far larger than its cash and cash equivalents:

Telegram further breaks down last year’s increase in its crypto holdings here:

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

Needless to say, Toncoin traders have not shrugged off the news of Durov’s arrest. Price chart courtesy of CoinMarketCap:

Usefully for Telegram, the events-after-the-reporting-date section of the accounts shows that it sold a big chunk of its Toncoin ahead of the price crash:

While Telegram is 100 per cent owned by Durov, the company has raised north of $2.3bn of convertible bonds from blue-chip investors such as sovereign wealth funds, hedge funds, and tech-focused investors.

Even leaving aside the heavy reliance on crypto and the substantial liabilities, one might question whether a business that had to burn through over $450mn of operating expenses to make $342.5mn of revenue is worth the “$30bn-plus” valuation Durov touted to the FT earlier this year.

When it comes to its founder’s arrest, however, investors in Telegram’s convertible bond that properly read the accounts can’t say they weren’t warned:

Since its founding, the Group has been firmly committed to guaranteeing the privacy of Telegram’s 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 violence-inducing content online. The core values of the Group have led to Telegram’s popularity with its users. However, the Group’s operations can be affected by legal and regulatory frameworks in different countries which are subject to frequent changes and varying interpretations.