What impact will the arrest of the Telegram founder in France have on TON?

Author: Liu Honglin, Jin Jianzhi, Mankun Blockchain

According to French television station TF1, Telegram founder and CEO Durov was arrested at a French airport on Saturday evening at 20:00 local time (GMT 18:00). The arrest was carried out by the French Air Transport Gendarmerie (GTA) as he had just arrived from Azerbaijan and was wanted under a French search warrant issued by the OFMIN department of the French National Judicial Police based on a preliminary investigation. The judicial authorities believe that Telegram's lack of content moderation, non-cooperation with law enforcement, and the provision of certain tools (such as disposable numbers and cryptocurrencies) have made Pavel Durov an accomplice to drug trafficking, child crimes, and fraud.

However, whether this accusation is sufficient to convict Durov remains to be seen through further legal scrutiny.

As the founder and CEO of the globally renowned communication platform Telegram, Pavel Durov's sudden arrest has caused a stir in the international tech and crypto community. This arrest has not only triggered a strong reaction from Telegram and its supporting TON community but has also become a seismic event in the global cryptocurrency market.

TON dropped 13.2% within 24 hours, reflecting market concerns about this incident. Nevertheless, the TON community quickly issued a statement afterward, expressing unwavering support for Durov and emphasizing that the community's operations and mission would not be affected by this event. This swift and resolute response helps to reassure investors and supporters both within and outside the community, but restoring market confidence will still take time.

It is noteworthy that Durov's arrest is not just an ordinary criminal case; it carries symbolic significance. Over the past few years, Telegram has attracted a large user base with its strong privacy protection and decentralized philosophy, especially in regions with a higher demand for freedom of speech. However, these very characteristics have also made it a breeding ground for some criminals. This dilemma reflects the increasingly tense relationship between technology and law today.

Following the incident, prominent figures from the tech and media sectors, including Elon Musk and Tucker Carlson, publicly expressed their support for Durov. Franklin Bi from Pantera Capital even initiated the "FreePavel" campaign. These statements indicate that Durov's influence extends beyond the tech circle into broader social and political realms.

Meanwhile, Dmitry Davankov, Deputy Chairman of the Russian State Duma, called on the Russian Foreign Ministry to take action to rescue Durov, indicating that this incident has transcended legal matters and begun to touch on international politics. Considering that Durov holds multiple nationalities, including Russian, French, and Emirati, the handling and outcome of this incident may have far-reaching implications for international relations.

Pavel Durov's arrest represents a collision between technological development and legal regulation, as well as a renewed reflection on global privacy, decentralization, and freedom of speech. As the case develops further, it may have profound impacts on the operational models of global tech platforms, especially Web3 projects.

The Past and Present of TON

Understanding the relationship with Telegram is crucial for 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 quickly grew to become one of the leading communication platforms globally, currently boasting nearly 900 million monthly active users and becoming an important tool for the Web3 community.

In 2017, in response to the demands of Telegram's vast user base, the Durov brothers began exploring blockchain solutions but found that no Layer 1 blockchain on the market at the time could meet their needs. Therefore, they decided to design their own Layer 1 chain, the Telegram Open Network (TON). Through a token sale (Grams) in 2018, Telegram raised $1.7 billion, setting a record for fundraising in the crypto industry.

*Image source: TON official website

However, just as the TON team released a detailed blockchain design architecture and launched two testnets, in October 2019, the U.S. Securities and Exchange Commission (SEC) accused Telegram of conducting an unregistered securities offering. This legal challenge significantly hindered the project's progress. After prolonged communication and legal battles with the SEC, Telegram announced in May 2020 that it would cease development of TON and agreed to pay a $18.5 million settlement while promising to return funds to investors.

Telegram's withdrawal did not mark the end of the TON project. Between 2020 and 2021, a team of passionate open-source developers called NewTON took up the mantle, inheriting and delving into TON's technical architecture and codebase, remaining true to the original design philosophy, and ultimately restarting the project. In May 2021, NewTON officially rebranded as the TON Foundation, and TON was renamed from Telegram Open Network to The Open Network, continuing its march toward decentralization and scalability.

Compliance Challenges of TON

During the period from 2019 to 2020, the original TON project's conflict with the SEC was not limited to the issue of unregistered securities; TON was also accused by the SEC of "insufficient investor protection." According to the SEC's allegations, Mankun lawyers identified several compliance issues:

Unregistered Securities Offering

Essentially, the dispute between TON and the SEC touches on a highly 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 four conditions: investment of money, expectation of profits, investment in a common enterprise, and profits primarily derived from the efforts of others. Therefore, in the case of TON, the SEC believes that Grams meets these conditions and should be regarded as a security subject to corresponding regulation.

Investor Protection and Transparency

In addition to the main issue of unregistered offerings, the SEC also accused TON of insufficient investor protection. The SEC argued that Telegram failed to adequately disclose risk information related to the Grams token, particularly regarding the token's economic model, governance structure, and market potential. This lack of information could lead investors to make investment decisions based on incomplete information, thus facing higher risks.

Cross-Border Legal Challenges

As an international project, TON's fundraising activities touch on multiple jurisdictions worldwide. This not only complicates compliance but also means facing potential conflicts and challenges from the laws of various countries, further increasing legal risks.

These challenges serve as hard lessons for the TON project but also provide important insights that have been applied to its subsequent compliance strategies. Next, Mankun lawyers will focus on analyzing the new TON architecture and its compliance strategies, providing reference ideas for Web3 entrepreneurs.

TON's Compliance Framework

After experiencing legal conflicts with the SEC, the TON project refocused on building a sound compliance framework to address potential legal and regulatory challenges in the future. After a thorough examination of the TON official website, Mankun lawyers discovered the compliance path that TON has adopted to operate stably across multiple jurisdictions.

Non-Profit Organization: TON Foundation

The six-month legal dispute with the SEC that began in October 2019 had a profound impact on TON. Therefore, in the pursuit of a compliance framework, TON chose to continue its development in the form of a non-profit organization, establishing the TON Foundation (The Open Network Foundation). The foundation selected Zug, Switzerland—a region known for its crypto-friendly regulations—as its new legal registration location, a place recognized for its high compliance costs.

*Image source: TON Foundation official website

According to official disclosures, the TON Foundation claims to be "a non-profit organization fully funded by community donations, maintaining the community's interests by supporting initiatives that help achieve its mission. The foundation supports the TON project without controlling the TON technology and is one of many network contributors in the decentralized TON community. TON operates on an open-source codebase, allowing anyone to contribute, and there is no single controlling entity."

"Non-profit, non-controlling, decentralized, mission, support" not only describes the role of the TON Foundation but also implies the legal effects that the foundation's structure will have—isolating risks that may arise from token issuance.

In fact, according to official disclosures, as the supervisory and educational institution for the TON blockchain and its related ecosystem, the TON Foundation undertakes many specific functions, including:

Community Governance. By publishing detailed roadmaps and regular progress reports, the foundation not only ensures project transparency but also guides the direction of TON's development. These reports elaborate on the tokenomics of TONcoin, issuance strategies, partner allocations, community incentives, and the operation and ecosystem uses of assets.

User Education. The foundation provides educational resources introducing the basics of blockchain and the unique technologies and ecosystems of TON to enhance user understanding and participation.

Developer Support. The foundation coordinates, supports, and funds projects valued by the community through its Grants Program, which not only attracts more developers but also promotes network growth and user engagement.

Brand Partnerships. For example, on July 22, 2024, the TON Foundation and the MOCA Foundation announced the establishment of a $20 million reserve for MOCA Coin and TONcoin, incentivizing developers and users to adopt the TON ecosystem through joint initiatives such as open alliances, hackathons, and accelerator programs.

Community Operations. Although the foundation is a non-profit entity, it also seems to undertake some commercial operational functions. For instance, it publishes interviews and press releases within the community, often directly using the foundation's name. In a July 23, 2024, article, it explicitly mentioned, "This is where the TON Foundation explores meme coins in the TON Ecosystem," indicating that the TON Foundation's risk isolation efforts may not be entirely thorough.

By choosing Switzerland as its registration location, the TON Foundation strives for high compliance to reduce legal risks. Its non-controlling, decentralized statement aims to prevent regulatory risks arising from token issuance. However, the specific functions it undertakes in actual operations and its association with commercial activities may require further clarification of its role to ensure full compliance with non-profit organization legal requirements and avoid potential legal and tax issues. This compliance framework requires ongoing legal review and transparency to ensure adherence to regulatory requirements in various countries and maintain public trust.

Operating Entity: TON Community

While the TON Foundation undertakes some community operational functions, much of the community operation is still the responsibility of the TON Community (TON Society). According to information disclosed on the official website, the TON Society has established active local communities in nine centers across Europe, Southeast Asia, and the Middle East, hosting up to 16 events per month, including various large conferences and activities, typically involving a large number of participants and open discussions. Therefore, one compliance challenge faced by the TON Society is that it may not be able to fully control all statements made during these events, particularly regarding public safety and speech management, which could lead to legal liability. In certain jurisdictions, if events involve the promotion of securities, financial products, or other regulated activities, this situation may be particularly sensitive and likely to attract regulatory scrutiny.

*Image source: TON official website

Mankun lawyers have discovered from the clues on the TON official website that the TON Society should be a legally qualified entity, but it has not yet been established. Meanwhile, TON seems to be planning to set up an offshore structure for the operating entity in the BVI, aiming to address potential legal liabilities arising from large-scale community activities. After all, it is difficult for operators to avoid hosting large meetings and controlling attendees' "passionate" statements, which can easily attract regulatory attention in specific jurisdictions.

Establishing an offshore company strategy not only helps to reduce risks arising from legal liabilities but also enhances the legal protection of the TON Society.

Development and Investment Entities

From the contact information left in the privacy policy document on the TON official website (office@falabs.io), First Stage Labs (also known as Top Labs or The Open Platform) is clearly an important component of TON. According to public information, this entity is registered in the UAE and is a venture studio focused on seed round investments in the TON ecosystem, with several 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 investments, Top Labs also has co-building capabilities, showcasing its strength as a development company to some extent. Notably, Top Labs operates several key functions of the TON official website, such as managing the wallet functionality and running a DEX platform called STON.fi. Additionally, Alena Shmalko, the ecosystem head of the TON Foundation, publicly acknowledged that the wallet functionality is operated by Top Labs, further confirming Top Labs' key role in development and technical services.

Another noteworthy point is the TONStat feature, which updates statistics on the TON blockchain daily, such as total transaction volume, performance, total fees, etc., with the contact email being TONstat@fslabs.io, which is another direct involvement of Top Labs.

Although Alena Shmalko, the ecosystem head of the TON Foundation, mentioned in a conversation, "This is not our team; that is a completely different company called TOP (The Open Platform), and they are responsible for running the wallet, operating one of the DEXs on TON, STON.fi, and many other great TON projects, all of which are invested in and built by TOP." Given the foundation's independent structure without shareholders, his statement is legally correct from a shareholder relationship perspective. But those in the know understand.

First Stage Labs plays a significant role in providing technical and investment support within the TON ecosystem. Its independence and specific functional division are crucial for the overall compliance and legal risk management of TON. Although the TON Foundation and First Stage Labs maintain legal independence, the close cooperation and overlapping roles in actual operations may raise complex legal and compliance issues. TON needs to ensure transparency, clarify responsibilities among parties, and adhere to relevant legal and regulatory requirements to maintain the compliance and stability of the entire TON ecosystem.

Insights for Web3 Startups

TON's compliance framework provides a successful example of how a Web3 project can ensure global operational legality and sustainable development through multi-layered legal and compliance arrangements. Here are some points that other Web3 startups can learn from TON's experience:

In-Depth Understanding and Application of International Law

Web3 companies should conduct in-depth research on the legal environment of their target markets before launching, especially regarding laws related to cryptocurrencies and blockchain technology. For instance, TON's choice of Switzerland as its registration location leverages Switzerland's relatively clear and friendly cryptocurrency laws. Additionally, companies should consider potential 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 globally.

Risk Isolation Strategies

By establishing independent legal entities or using decentralized liability company structures (such as BVI offshore companies), legal risks arising from the actions of certain departments within the company can be effectively isolated. For example, TON's multi-layered corporate structure can serve as a model for isolating risks associated with technology development and capital operations. This structure helps protect core assets in the face of legal litigation or regulatory scrutiny.

Establishing a Robust Compliance Review Mechanism

Web3 companies should establish a systematic compliance review mechanism that not only monitors the compliance of internal operations but also reviews the compliance status of external partners and service providers. For instance, while TON manages certain key functions through Top Labs, it must ensure that these service providers operate fully in accordance with legal regulations.

Transparency and Community Communication

Increasing transparency regarding project progress, financial status, and management decisions is key to building trust. For example, the TON Foundation's transparent operations and regular community updates help enhance user and investor confidence while reducing regulatory concerns. Additionally, effective community communication can increase user engagement, providing more market feedback and development momentum for the project.

Strategies for Addressing Complex Legal Challenges

Web3 projects should anticipate and prepare to address legal challenges from different jurisdictions. This includes collaborating with professional legal advisors, regularly assessing project compliance, and preparing to respond to potential legal disputes. TON's experience highlights the importance of timely communication with regulatory agencies and reaching settlements.

By implementing these strategies, Web3 companies can not only enhance their legal risk 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 and legally compliant global business.