Author: Liu Honglin, Jin Jianzhi
According to French TV station TF1, Durov, the founder and CEO of Telegram, was arrested at a French airport at 20:00 local time (GMT 18:00) on Saturday night. The arrest was carried out by the French Gendarmerie of Air Transport (GTA), who had just arrived from Azerbaijan and was wanted by the OFMIN department of the French National Judicial Police based on a French search warrant issued by a preliminary investigation. The judiciary believes that Telegram's lack of content moderation, non-cooperation with law enforcement, and some of the tools it provides (disposable numbers, cryptocurrencies, etc.) make Pavel Durov an accomplice in drug trafficking, child crimes and fraud.
However, whether this charge is sufficient to convict Durov requires further legal review.
As the founder and CEO of the world-renowned communication platform Telegram, the sudden arrest of Pavel Durov has caused an uproar in the international technology and crypto communities. The arrest has not only triggered a strong reaction from Telegram and the TON community behind it, but has also become a shocking event in the global cryptocurrency market.
TON fell 13.2% in 24 hours, showing the market's concerns about the incident. Despite this, the TON community quickly issued a statement afterwards, expressing its firm support for Durov and emphasizing that the community's operations and mission will not be affected by this incident. This quick and firm response helped to reassure investors and supporters inside and outside the community, but it will take time for market confidence to recover.
It is worth noting that Durov's arrest is not just an ordinary criminal case, it is more symbolic. In the past few years, Telegram has been attracting a large number of users with its strong privacy protection and decentralized concept, especially in areas with higher demand for freedom of speech. However, it is these characteristics that have also made it a hotbed for some criminals. This dilemma reflects the increasingly tense relationship between technology and law today.
After the incident, heavyweights in the technology and media circles, including Elon Musk and Tucker Carlson, publicly expressed their support for Durov. Franklin Bi of Pantera Capital even launched a "Free Pavel" campaign. These statements show that Durov's influence is not limited to the technology circle, but also extends to a wider social and political level.
At the same time, Russian State Duma Deputy Chairman Davankov called on the Russian Ministry of Foreign Affairs to take action to rescue Durov, indicating that the incident has gone beyond the legal level and has begun to involve the field of international politics. Considering that Durov has multiple nationalities including Russia, France and the United Arab Emirates, the handling of this incident and its results may have a profound impact on international relations.
The arrest of Pavel Durov is a collision between technological development and legal supervision, and a global reflection on privacy, decentralization, and free speech. As the case develops further, it may have a profound impact on the operating model of global technology platforms, especially Web3 projects.
The past and present of TON
Understanding the relationship with Telegram is crucial to understanding TON. Telegram is a free instant messaging software founded by brothers Pavel and Nikolai Durov in 2013. With its high level of security and user experience, Telegram has quickly grown into one of the world's leading communication platforms, with nearly 900 million monthly active users to date, and has become an important tool for the Web3 community.
In 2017, facing the needs of Telegram's huge user base, the Durov brothers began to explore blockchain solutions, but found that there was no Layer 1 blockchain on the market that could meet their needs. Therefore, they decided to design their own Layer 1 chain, the Telegram Open Network (TON). Through a round of token sales (Grams) in 2018, Telegram raised $1.7 billion, setting a record for fundraising in the crypto industry.
*Image source: TON official website
However, just after the TON team released a detailed blockchain design architecture and launched two test networks, in October 2019, the U.S. Securities and Exchange Commission (SEC) accused Telegram of conducting an unregistered securities offering. This legal challenge greatly hindered the progress of the project. After long-term communication and legal struggles with the SEC, Telegram announced in May 2020 that it would stop the development of TON and agreed to pay a settlement of US$18.5 million, while promising to return the funds to investors.
Telegram's withdrawal does not mark the end of the TON project. Between 2020 and 2021, a team of enthusiastic open source developers, NewTON, took on the responsibility. They inherited and deeply studied TON's technical architecture and code base, stayed true to the original design concept, and finally restarted the project. In May 2021, NewTON was officially renamed the TON Foundation, and TON was renamed from the original Telegram Open Network to The Open Network, continuing to move towards decentralization and scalability.
TON’s Compliance Challenges
During 2019-2020, the conflict between the original TON project and the U.S. Securities and Exchange Commission (SEC) was not limited to the issue of unregistered securities. TON was also accused by the SEC of "inadequate investor protection". Based on the SEC's allegations, attorney Mankiw divided several compliance issues:
Unregistered securities offerings
Essentially, the dispute between TON and the SEC touches on a very challenging issue in the field of digital assets: how to define the nature of digital tokens and whether they should be considered securities. According to the U.S. Howey Test, an investment constitutes a security if it meets the following four conditions: investment of money, expected profit, investment in a common cause, and profit primarily achieved through the efforts of others. Therefore, in the case of TON, the SEC believes that Grams meets these conditions and should therefore be considered securities and subject to corresponding regulation.
Investor Protection and Transparency
In addition to the main issue of unregistered issuance, the SEC also accused TON of insufficient investor protection. The SEC believes that Telegram failed to fully disclose risk information related to Grams tokens, especially in terms of the token's economic model, management structure and its market potential. This lack of information may cause investors to make investment decisions based on incomplete information, thereby facing higher risks.
Cross-border legal challenges
As an international project, TON’s fundraising activities involve multiple jurisdictions around the world. This not only complicates compliance, but also means facing possible conflicts and challenges in the laws of multiple countries, further increasing legal risks.
These challenges are hard lessons for the TON project, but they also provide important insights and are applied to its subsequent compliance strategies. Next, Attorney Mankiw will focus on analyzing the new TON architecture and its compliance strategy to provide reference ideas for Web3 entrepreneurs.
TON’s compliance architecture
After experiencing a legal conflict with the SEC, the TON project has refocused on building a sound compliance framework to cope with possible legal and regulatory challenges in the future. After digging deep into the TON official website, attorney Mankiw discovered the compliance methods that have enabled TON to operate stably and actively in multiple jurisdictions.
Non-profit organization: TON Foundation
The six-month-long legal dispute with the U.S. Securities and Exchange Commission (SEC) that began in October 2019 has had a profound impact on TON. Therefore, on the road to re-pursuing a compliance structure, TON chose to continue development in the form of a non-profit organization, that is, the TON Foundation (The Open Network Foundation) was established. The foundation chose the Swiss canton of Zug — a Crypto Valley known for its cryptocurrency-friendly regulations — as its new legal domicile, a location known for its high compliance costs.
*Image source: TON Foundation official website
According to official information, the TON Foundation claims that it is "a non-profit organization funded entirely by community donations and safeguards the interests of the community by supporting initiatives that help achieve its mission. The Foundation provides support for the TON project without controlling TON technology and is one of the many network contributors to the decentralized TON community. TON runs on an open source code base, allowing anyone to contribute, and there is no single controlling body."
“Non-profit, non-control, decentralized, mission-based, supportive” not only describes the role of the TON Foundation, but also implies the legal effect that the foundation structure will have - isolating the risks that may arise from the issuance of tokens.
In fact, according to official information, as a supervisory and educational institution for the TON blockchain and its related ecosystem, the TON Foundation has assumed a lot of specific functions, including:
Community governance. By publishing detailed roadmaps and regular progress reports, the foundation not only ensures the transparency of the project, but also grasps the development direction of TON. These reports elaborate on TONcoin's token economics, issuance strategy, partner allocation, community incentives, and asset operations and ecosystem uses.
User education. The Foundation provides educational resources to introduce the basics of blockchain and TON’s unique technology and ecosystem to enhance user understanding and participation.
Developer support. The Foundation coordinates, supports and funds projects that are valued within the community through the Grants Program, which not only attracts more developers to join, but also promotes network growth and user activity.
Brand cooperation. For example, on July 22, 2024, the TON Foundation and the MOCA Foundation announced a joint establishment of a $20 million MOCA Coin and TONcoin reserve to encourage developers and users to adopt the TON ecosystem through joint incentives such as open alliances, hackathons, and accelerator programs.
Community operation. Although it is a non-profit organization, the foundation seems to have assumed some business operations. For example, interviews and press releases are published within the community, which usually use the name of the foundation directly. In the July 23, 2024 manuscript, it is clearly mentioned that "This is where the TON Foundation explores meme coins in the TON Ecosystem", which shows that the TON Foundation is not thorough in risk isolation.
The TON Foundation has chosen Switzerland as its place of registration in an effort to achieve high compliance in order to reduce legal risks. Its decentralized and non-controlling statements are intended to prevent regulatory risks arising from the issuance of tokens. However, the specific functions and links to commercial activities undertaken by the Foundation in actual operations may require further clarification of its role to ensure full compliance with the legal provisions of non-profit organizations and avoid potential legal and tax issues. This compliance framework requires continuous legal review and transparency to ensure compliance with regulatory requirements in various countries and maintain public trust.
Operation Entity: TON Community
Although the TON Foundation has assumed some community operation functions, more community operations are still the responsibility of the TON Community (TON Society). According to information disclosed on the official website, TON Society has established active local communities in 9 centers in Europe, Southeast Asia, and the Middle East, and holds up to 16 events per month, including various large-scale conferences and events, which often involve a large number of participants and public discussions. Therefore, one compliance challenge facing TON Society is that it may not be able to fully control all speech made at these events, especially in terms of public safety and speech management, which may lead to legal liability. In some specific jurisdictions, if the activities involve the promotion of securities, financial products, or other regulated activities, this situation may be particularly sensitive and easily attract the attention of regulators.
*Image source: TON official website
Lawyer Mankiw found from the clues on TON's official website that TON Society should be a legally qualified entity, but it has not yet been established. At the same time, TON seems to be planning to set up an offshore structure of a BVI company for the operating entity to deal with potential legal liabilities brought about by large-scale community activities. After all, it is difficult for operators to avoid holding large-scale meetings and control the "passionate" speeches of participants, which is more likely to attract regulatory attention in specific jurisdictions.
The strategy of setting up an offshore company not only helps to reduce the risk of legal liability, but also enhances the legal protection of TON Society.
Development entities and investment and financing entities
Judging from the contact information office@falabs.io left in the privacy policy document of TON's official website, First Stage Labs (also known as Top Labs or The Open Platform) is obviously an important part of TON. According to public information, this organization is registered in the UAE and is a venture capital studio focusing on seed round investments in the TON ecosystem. It has a number of public investment records, indicating its core role in the TON ecosystem.
*Image source: crunchbase official website
According to information disclosed by Top Labs, in addition to investment, Top Labs also has co-building capabilities, which to some extent demonstrates its strength as a development company. In particular, Top Labs runs several key functions of the TON official website, for example, it is responsible for managing TON's wallet function and operating a DEX platform called STON.fi. In addition, Alena Shmalko, the head of the ecosystem at the TON Foundation, publicly admitted that the wallet function is operated by Top Labs, which further confirms Top Labs' key role in development and technical services.
Another point worth noting is the TONStat feature, which updates statistics on the TON blockchain daily, such as total transaction volume, performance, total fees, etc. The contact email address is TONstat@fslabs.io, which is also another direct involvement point for Top Labs.
Although Alena Shmalko, head of the TON Foundation ecosystem, mentioned in a conversation that "this is not our team, it is a completely different company called TOP (The Open Platform), which is responsible for running wallets, operating STON.fi, one of the DEXs on TON, and many other great TON projects, all of which are invested and built by TOP." Given that the foundation itself is independent and has no shareholder structure, his words are not wrong from the perspective of equity legal relations. But those who understand will understand.
First Stage Labs plays an important role in technical and investment support in the TON ecosystem. Its independence and specific functional division of labor are crucial to TON's overall compliance and legal risk management. Although the TON Foundation and First Stage Labs remain legally independent, close cooperation and overlapping roles in actual operations may raise complex legal and compliance issues. TON needs to ensure transparency, clarify the responsibilities of all parties, and follow relevant legal and regulatory requirements to maintain the compliance and stability of the entire TON ecosystem.
Inspiration from Web3 startups
TON's compliance framework provides an example of how a successful Web3 project can ensure the legitimacy and sustainability of global operations through multi-layered legal and compliance arrangements. Here are a few points that other Web3 startups can learn from TON's experience:
Deep understanding and application of international law
Web3 companies should thoroughly research the legal environment of their target markets before launching, especially laws related to cryptocurrencies and blockchain technology. For example, TON chose Switzerland as its place of registration, taking advantage of Switzerland's relatively clear and friendly cryptocurrency laws. In addition, companies should also consider possible conflicts in the laws of other countries and regions, especially in cross-border transactions and operations, to ensure the legality and feasibility of their business models worldwide.
Risk Isolation Strategy
By establishing an independent legal entity or using a corporate structure with decentralized liability (such as a BVI offshore company), legal risks that may arise from the actions of certain departments of the company can be effectively isolated. For example, TON's multi-level corporate structure can serve as an example of isolating technology development and fund operation risks. This structure helps protect core assets in the face of legal proceedings or regulatory scrutiny.
Establish a sound compliance review mechanism
Web3 companies should establish a systematic compliance audit mechanism to monitor not only the compliance of internal operations, but also the compliance of external partners and service providers. For example, TON manages certain key functions through Top Labs, but at the same time needs to ensure that the operations of these service providers are in full compliance with legal regulations.
Transparency and community communication
Increasing transparency into project progress, financial status, and management decisions is key to building trust. Transparent operations and regular community updates by the TON Foundation, for example, can help boost user and investor confidence and reduce regulatory concerns. In addition, effective community communication can increase user engagement, providing more market feedback and momentum for projects.
Strategies for complex legal challenges
Web3 projects should anticipate and prepare for legal challenges from different jurisdictions. This includes working with professional legal advisors, regularly assessing the project's compliance, and preparing for potential legal disputes. TON's experience shows the importance of timely communication and settlement with regulators.
By implementing these strategies, Web3 companies can not only enhance their legal resilience, but also expand steadily in the global market while ensuring compliance with increasingly stringent legal and regulatory requirements in various countries. These measures will help entrepreneurs build a sustainable, legal and compliant global business.
