TON’s value relies heavily on its integration with Telegram. How future blockchain projects avoid being accused of facilitating criminal activity may depend on their degree of decentralization.
Written by Galaxy Research
Compiled by: 1912212.eth, Foresight News
Telegram founder and CEO Pavel Durov was arrested by French intelligence services after landing in Paris on Saturday. Crypto network TON tokens fell immediately after the news was released, but have since stabilized. At present, the charges do not appear to be directly related to TON. It is unclear whether the arrest foreshadows a wider crackdown on decentralized systems, including TON, or whether it will extend to other social media/communication applications or other blockchain networks.
What happened: Pavel Durov was arrested after his private jet landed at a Paris airport and charged with crimes related to organized crime, drug trafficking, fraud, cyberbullying and terrorist propaganda, according to AFP. The charges apparently stem from a failure to prevent criminals from abusing Telegram, according to French media reports. The TON crypto asset associated with the Telegram app plunged as much as 25% after the news of the arrest was announced, and is currently trading about 34% below its all-time high in June 2024. Telegram said in a statement that Durov had nothing to hide.
Cryptocurrency involved: TON
Telegram background: Telegram has been in dispute with the European Commission over whether it is large enough to register under the Digital Services Act (DSA). Telegram believes that because it has not yet reached 45 million monthly active users in Europe, it does not yet meet the registration and compliance requirements of the DSA. Platforms that meet the definition of "very large online platforms" are responsible for illegal content of their users once they are notified of such content. This "conditional liability" is fundamentally in conflict with the broad immunity from liability provided for online platforms by Section 230 of the U.S. Communications Standards Act of 1996.
Considering new reports that the arrest warrant was issued by Ofmin, an intelligence agency tasked with protecting minors from violence, it appears that Durov faces violations of French law rather than those of the DSA, although given France’s important position in the EU and its support for the DSA, the distinction may be moot.
According to Durov, Telegram has about 950 million monthly active users, making it one of the most widely used apps in the world. Telegram is essentially a messaging app, known for its powerful group chat features, but it is also used for more social media-like activities, where broadcast channels play a role similar to Twitter feeds. These channels are often used by armed groups, including Ukrainian and Russian forces.
Telegram is also widely used for communication within the crypto community, from large project-focused group chats to smaller group chats between industry professionals and even between OTC trading desks and their counterparties.
TON: The U.S. Securities and Exchange Commission (SEC) sued Telegram in October 2019, when the company launched its TON blockchain and tokens by raising $1.7 billion in funding, one of the largest token fundraisings in history at the time. Soon after, a U.S. federal court sided with the SEC and blocked Telegram from issuing tokens. Telegram initially appealed the ban, but later abandoned the effort.
Telegram subsequently stopped work on the project, but not before making all of its code open source, including blockchain nodes, crypto wallets, TON payment and file storage components, and technical documentation on the TON consensus protocol. In 2020, Telegram agreed to a settlement that required the company to pay recovered funds to TON token investors and pay an $18.5 million settlement to the SEC.
TON was eventually launched by open-source developers in November 2019. Telegram has been extensively integrated with The Open Network and TON assets, allowing users to access the blockchain and conduct transactions through Telegram.
TON Network Overview: TON is the native asset of The Open Network (TON), the 11th largest crypto asset by market capitalization, with a market capitalization of over $14 billion, below Tron and above Cardano. According to CoinGecko, TON has a FDV of $28.5 billion and a daily trading volume of over $1 billion on centralized exchanges.
As of this writing, the network has 600,000 wallets and performs 6 million transactions per day.
The proof-of-stake network is secured by approximately 370 validators who have staked $3.35 billion worth of TON in 28 countries, earning an annual yield of 4.2% (Tonscan.org).
As of this writing, the total TVL of TON DeFi (excluding staking and liquidity staking applications) is approximately $300 million.
85% of TON DeFi’s total locked value (TVL) is concentrated in two decentralized exchange applications: DeDust and Ston.fi. The vast majority of TVL in these two applications (76.6% for DeDust and 68.7% for Ston.fi) is concentrated in their TON/USDT pools.
The total 30-day trading volume of DEXs on the TON network is approximately $1.4 billion.
According to Messari's calculations (after removing wash trading), TON's recent trading volume on centralized exchanges is between $200 million and $600 million, with the trading volume on August 25, 2024 (Sunday) being the largest day this year, exceeding $1 billion.
There is approximately $730 million USDT in circulation on the TON network, most of which is locked in the TON/USDT pool. This represents only 0.61% of the USDT circulating supply.
Analysis: It is likely that Telegram and Durov have been resisting takedown or information requests from Europe or France. It is unclear to what extent the charges against Pavel involve TON or Telegram's integration with TON. Allegations of fraud or money laundering could revolve around Telegram's integration with TON and/or TON's use in illegal activities, but we don't know that at this time. Currently, while TON appears to have over 350 validators worldwide, it is unclear how many, if any, are operated by Telegram or its affiliates. Therefore, if France or any other major government attempted to attack or shut down TON as part of Durov's arrest, or for any other reason, it is unclear how resilient TON would be. We know that TON's value relies heavily on its continued integration with Telegram.
In the grand scheme of things, this is the first major arrest of a CEO of a globally prominent messaging/social media company for failing to adequately police their platform, but it may not be the last. Governments have long been hostile to cryptography and encryption—from the U.S. government’s stigmatization of PGP in the early 90s to the attack on Apple’s iPhone encryption in the 2000s. Telegram is widely used around the world by a variety of different groups, including political dissidents and warring factions (both state and non-state), as well as possible criminals or other undesirable actors. If Durov refuses to cooperate with government investigations into illegal activity on Telegram, or fails to do so, he will undoubtedly become a law enforcement target.
According to Preston Byrne, a prominent encryption and free speech lawyer: The big question now is whether Durov intended to operate his service as a criminal enterprise, making it materially different from other platforms like WhatsApp.
Beyond criminal activity, platforms face increasing pressure to moderate controversial speech. Prior to an interview with former President Donald Trump, Tesla, SpaceX, and X CEO Elon Musk reported receiving a letter from the UK censor warning Musk that the X platform could violate UK law if the interview led to the spread of false information. Both major political camps in the United States have accused social media companies of manipulating the 2020 election, and the Supreme Court recently rejected lawsuits filed by dozens of Republican-led states challenging the federal government’s interactions with major social media platforms on election security and COVID-19 response. It’s not hard to imagine that enforcement against social media companies for crime prevention will eventually escalate to protection against false information.
How deep public chains will sink in this process of internet polarization and firewallization remains to be seen. There have been attempts to apply financial regulatory laws to public chain infrastructure—such as miners, validators, and nodes—but these efforts have mostly stalled. On November 28, 2023, Wally Adeyemo, Undersecretary of the U.S. Treasury, sent a letter to Senator Sherrod Brown, Chairman of the Senate Banking Committee, asking for an expansion of the Treasury Department’s authority to apply Bank Secrecy Act regulations to blockchain infrastructure and allow sanctions on autonomous code (smart contracts). Senator Elizabeth Warren (D-MA) included some of the most extensive requirements of the proposal in her Digital Asset Anti-Money Laundering Act (DAAMLA). The Financial Action Task Force (FATF) guidelines also recommend monitoring and travel rule compliance for “unhosted wallets,” something the U.S. Financial Crimes Enforcement Network (FinCEN) has also explored (although recently abandoned).
The extent to which TON can avoid being associated with Durov and Telegram, or other blockchains can avoid being targeted by law enforcement for their use by criminals, may depend on how decentralized they are. While states can still ban the use of decentralized networks, the extent to which states can actually prevent their use or hold someone accountable, as they did with Durov, depends on the limits of how decentralized the network is.
Outlook
We are watching developments in France and awaiting any plea agreement between Durov and French authorities to understand how The Open Network might be impacted. If resolving the charges against him requires Durov to abandon The Open Network or remove it from Telegram, this would be extremely detrimental to TON. On the other hand, if Durov is able to reach an agreement with France that allows Telegram to continue operating largely unaffected and does not involve weakening Telegram's integration with TON, TON's recent price volatility may be short-lived.
