In the wake of Telegram CEO Pavel Durov’s bombshell arrest in France last weekend and subsequent criminal indictment, much is still uncertain—particularly, how the high-stakes drama will impact Telegram’s massive crypto ambitions. 

This year, Telegram became perhaps the most prominent company to ever jump with both feet into the cryptosphere. The dominant messaging service encouraged the proliferation of an ecosystem of on-chain, in-app games and services powered by Telegram’s blockchain of choice, The Open Network (TON). Those so-called “mini apps” exploded in popularity this spring, largely thanks to their ability to earn users crypto rewards via token airdrops. 

Momentum from mini app activity catapulted Telegram to a record 950 million monthly active users in July, and Telegram has directly embraced TON by using it to pay channel operators a share of advertising revenue, along with launching an in-app currency called Stars that’s linked with TON.

The company’s new path appeared so limitless that some TON developers prophesied the app might soon ride its on-chain mini app model to become the West’s version of China’s “everything app,” WeChat.

But crypto is also, notoriously, a legally risky sandbox to play in. So now that Telegram appears to have awoken the regulatory beast, could the company’s crypto future be in jeopardy?

“How big do they want to get?”

The charges filed against Telegram CEO Pavel Durov on Wednesday do not mention cryptocurrency whatsoever. They focus instead on content related to illegal topics like child pornography and drug sales that Durov allegedly allowed to proliferate on his platform. 

But the timing of the indictment—in the midst of Telegram’s aggressive push to make crypto-backed financial services a central offering—speaks loudly, according to Seth Goertz, a former U.S. Attorney specializing in cryptocurrency and cybersecurity.

“The more they go down that road, the more they’re inviting scrutiny,” Goertz told Decrypt of Telegram’s finance and commerce-related ambitions. “How big do they want to get?”

The former prosecutor specifically pointed to the integration, in April, of the popular stablecoin Tether (USDT) with both TON and the Wallet app on Telegram. While the move was a massive boon for Telegram’s mini apps, allowing users to transact in a dollar-backed currency that doesn’t fluctuate nearly as much as TON’s native token, the stablecoin also has a long track record of fueling illicit activity due to that same attractiveness.  

“If governments are seeing large amounts of Tether being moved through Telegram, it is going to attract tremendous scrutiny, for sure,” Goertz said. “The dollar is a powerful thing.”

Decrypt reached out to numerous TON developers and creators of Telegram mini apps for this story regarding their views on Durov’s arrest, and how it might impact the future of Telegram’s crypto-related ambitions. All declined comment.

Telegram did not respond to multiple requests for comment on this story.

Crypto tech vs. crypto attitude

Not everyone is adamant that the factors that compelled the French government to arrest Durov have anything to do with crypto or any other technology peddled by Telegram—potentially indicating that the company’s “everything app” ambitions may not be the center of the story. 

Despite this week’s uproar on Crypto Twitter—which framed Durov’s arrest as an assault on user rights to privacy—Ben Rubin, the founder of the once-trendy, since-shuttered video chat app Houseparty, believes Telegram didn’t ruffle many feathers with its actual privacy features.

In reality, the app is actually less secure by default than other popular messaging platforms with automatic end-to-end encryption like Signal, iMessage, and even WhatsApp.

Crucially, though, Telegram’s leadership is notoriously standoffish when it comes to dealing with government entities. This created a perfect storm, in Rubin’s opinion, with Telegram sitting on lots of vulnerable data about its users, but refusing to hand it over. 

“My intuition is that this has nothing to do with crypto,” Rubin told Decrypt. “When a platform not only doesn’t protect user privacy—by not introducing end-to-end encryption—but also pisses off the regulators, you get the situation that you’re in now.”

In that sense, Telegram and Durov may now be in trouble less due to crypto tech, and more due to embodying the same kind of anti-establishment attitude that has fueled the crypto industry and made Durov something of a free speech icon.

When French prosecutors announced charges against Durov on Wednesday, they specifically underscored how Telegram’s failure to communicate whatsoever with government entities was a crucial factor that aggravated the entire situation.

“This indictment is the result of a thorough investigation into Telegram’s near-total lack of response to judicial requests, which has been a concern for multiple law enforcement agencies across Europe,” prosecutor Laure Beccuau said.

Rubin, who is currently building Towns, a permissionless app for group chats that runs on Ethereum layer-2 network Base, said such conflict could be easily avoided if Telegram adopted an inverse to its current approach: encrypting all user messages automatically, and letting law enforcement in—when necessary—to parse through other more extraneous data.  

“This is how you actually find a good balance where the regulators don’t have too much access to things, and they cannot abuse the power,” Rubin said. 

“But they actually need to do work,” he added of regulators. “And I think we will be in trouble if, for anyone who builds online communication, regulators come and ask to cooperate and we all give them the finger. That’s not going to work out.”

In recent days, Durov’s arrest has become a rallying cry for tech leaders ranging from Elon Musk to prominent crypto investor and former Coinbase CTO Balaji Srinivasan.

Crypto advocates in particular have rushed to the Telegram founder’s defense, framing his prosecution as an existential attack on the foundational pillars of the decentralization movement. 

But was it actually groundbreaking crypto tech that so irked the French government in Durov’s case? Or rather, his defiant and dogmatic personification of the crypto persona?

Edited by Andrew Hayward

Five years ago, Brian Frye set an elaborate trap. Now the law professor is teaming up with a singer-songwriter to finally spring it on the SEC in a novel lawsuit—and in the process, prevent the regulator from ever coming after NFT art projects again.

Earlier this week, Frye and musician Jonathan Mann filed a federal lawsuit against the U.S. Securities and Exchange Commission that seeks to finally force the agency to articulate its position on the legal status of NFTs. Over and again, the SEC has sued cherry-picked NFT projects it says qualify as unregistered securities—but never once has the regulator defined what types of NFT projects are legal and which are not, casting a chill over the nascent industry. 

The offbeat saga of this week’s lawsuit begins in 2019, when Frye, an expert in securities law and a fan of novel technologies, minted an NFT of a letter he sent to the SEC in which he declared his art project to constitute an illegal, unregistered security. If the conceptual art project wasn’t a security, Frye challenged the agency, then it needed to say so. 

The SEC never responded to Frye—not then, and not after several more self-incriminating correspondences from the professor. But in due time, the agency began vigorously pursuing, and suing, NFT projects. 

Last September, when the regulator came after actress Mila Kunis’ NFT-based cartoon series Stoner Cats, many artists who depend on revenue from NFT sales became concerned. Jonathan Mann, a musician who has written a new song every day since 2009, was one such artist. But he wasn’t just concerned—he was outraged.

“Any time I talk to the Stoner Cats people, or other people who have been affected [by the SEC], steam comes out of my ears,” Mann, better known as “Song A Day Mann,” told Decrypt. “I physically feel angry.”

Stoner Cats, an animated web series developed by Mila Kunis that featured the vocal talents of several A-list actors and Ethereum creator Vitalik Buterin, sold NFT passes required to view the program. Stoner Cats’ creators ultimately reached a $1 million settlement with the SEC without admitting wrongdoing, but the suit all-but killed the project, as well as another NFT-powered series backed by Kunis. 

The same day as the Stoner Cats settlement, Mann posted a new tune entitled “This Song is A Security.” (He’s a quick writer.) Mann resolved at that moment to fight back against the SEC, and defend his right—plus the rights of other artists like him—to earn revenue through the sale of NFTs. That would involve voluntarily poking his head out of the ground and challenging the agency head-on, despite the fact that the Commission hadn’t sued him yet. But Mann felt like he had no other choice.

“No one wants to be under the eye of the SEC,” he said. “But I feel like our cause is so righteous, so clear cut to me, that it seemed like a no-brainer.”

Mann soon connected with a legal team deeply rooted in the cryptoverse that liked the idea of forcing the SEC’s hand regarding its NFT policies with a preemptive lawsuit. They just needed another plaintiff. Frye, who’d practically been salivating for such an opportunity for half a decade, was a natural fit. 

“In the past, the SEC has always been able to choose its own defendants,” Frye told Decrypt. “So they went after people like Stoner Cats, because they knew they could paint Stoner Cats in a bad light. They knew they could bully them into settling.”

But now, Frye and Mann are drawing the battle lines. In the lawsuit filed against the SEC in Louisiana earlier this week, they challenged the SEC’s standing to regulate their NFT-backed artworks as securities, and demanded the agency declare that their respective art projects do not constitute illegally unregistered securities offerings. 

Mann even commemorated the occasion with a new song (mintable as an NFT, of course) titled “I’m Suing the SEC.”

“Like, I didn’t grow up with a distant dream… of someday suing a government agency,” the upbeat anthem goes. “But there’s this rogue regulator who’s been up to no good… Doing his very best to try and mess with my livelihood.”

Fundamentally, Frye believes, there is a gaping logical hole in the SEC’s approach to NFTs. For decades, as Frye has long emphasized, the regulator has refrained from regulating the art market, even pieces routinely bought as stores of value, and sold in series of identical or near-identical derivatives.  

So what is it about putting such art pieces on-chain that would automatically make them securities? And why would only some NFT projects fall under the SEC’s authority, then, but not others?

“I don’t think they want to say the quiet part out loud, which is: ‘We can regulate whatever the fuck we want,’” Frye said. 

The law professor is thus quite excited at the prospect of finally forcing the SEC to explain the contours of its NFT policies in federal court. 

“I think that’s going to be a really difficult thing for them to do,” he said. 

If this week’s lawsuit represents a thrilling and long-overdue intellectual battle with the American state to Frye, its meaning is somewhat more existential to songwriter Mann. 

“I want to know, for myself and for everyone that I know trying to make a living by making NFTs, that what we’re doing is not going to draw Sauron’s eye,” Mann said, name checking the all-seeing, all-destroying, all-powerful villain of The Lord of the Rings fame.

The lawsuit has no guarantee of offering some conclusive end to the NFT regulation question, both readily admit. That may only come with concrete legislation or a judgment by the Supreme Court. 

Regardless, the professor and the musician are both feeling catharsis—though for slightly different reasons—at the prospect of finally putting the SEC’s seemingly contradictory stance on NFTs on trial.

“This is a really deep, profound, existential, ontological problem that has to be resolved one way or another,” Frye said. “I’m not saying I know what the right answer is. I’m just saying there has to be an answer.”

As pressure builds, then dissipates, then builds again for President Joe Biden to abandon his struggling campaign for re-election, most players in Washington have seen much risk and little reward in coming down publicly on one side of the increasingly heightened debate. 

For DC’s crypto policy leaders, the question of whether to push for Biden to drop out is a sticky one. 

It’s true that the president’s administration is widely reviled in the crypto industry, for a multitude of reasons—from vocally backing the Security and Exchange Commission (SEC’s) crusade against crypto firms, to its vetoing of key pro-crypto legislation.

On the other hand, the president’s administration has started making overtures to the industry that some have found  encouraging. Further, it’s completely up in the air who might replace Biden as the Democratic nominee should he step aside, let alone what their stance on crypto might be.

In spite of those question marks, several prominent crypto policy makers and lobbyists who spoke with Decrypt are privately clamoring for Biden to drop out, regardless of who succeeds him. 

As the thinking goes: things couldn’t possibly get any worse than they already are. 

“The general outlook of the industry is that anything—even if it’s another Democratic administration—anybody would be better than what we have now,” one crypto lobbyist who asked not to be named told Decrypt. 

“How could it be worse?” they continued. “Could you have a less cooperative SEC chair, for example?”

Biden’s ongoing crisis of legitimacy has prompted some industry leaders to interrogate what exactly about the president’s administration has made it so hostile to crypto. Republicans have pushed the line of late that opposition to crypto is endemic to the Democratic Party. 

But multiple crypto policy experts said that the problem likely stems from what they see as the disproportionate influence of noted crypto critic, Senator Elizabeth Warren (D-MA), over the financial services policy of the Biden Administration. 

One crypto policy expert who asked not to be named told Decrypt that Warren’s sway over Biden’s banking policy is so total that the prevailing wisdom in Washington is that she and Biden brokered a closed-door deal regarding her say in his administration going back to the 2020 Democratic primary. She appears to have hand-picked numerous key agency appointments, for example, and her fingerprints are all over the White House’s crypto-related decision-making.

“There seems to have been some sort of quiet deal where she would get free rein over financial services policy in exchange for staying out of presidential politics,” the policy expert said. “Her worldview has been the cornerstone of Biden’s financial services policy.”

If Biden is axed, so the thinking goes, then Warren’s sizable influence over presidential fiscal policy will also be out on the street. 

“Being that Senator Warren has such influence with this administration, maybe she would have less in another,” the aforementioned crypto lobbyist said.

Another axis that gives crypto’s DC contingent hope when it comes to Democrats is age. 

The Democratic Party’s most vocal crypto proponents tend to skew younger. Given the centrality of age to Biden’s current public relations crisis, most of the leading candidates to replace him—like Vice President Kamala Harris, Michigan Governor Gretchen Whitmer, and Maryland Governor Wes Moore—are much younger than Biden. That gives industry leaders hope.  

“I think there’s a lot of opportunity with younger members of the party to ultimately rise up and be much friendlier to the crypto industry,” the crypto policy expert said. 

One prominent crypto lobbyist who requested anonymity for this story, however, criticized colleagues who they felt were overstating the impact that a Biden dropout would have on the industry—calling such forecasters “unsophisticated people.” 

“You have to play the hand you’re dealt,” the lobbyist told Decrypt. “We have this administration, we have this SEC chair, we have this Congress, and we should be doing what we can do in this moment.”

“That is the only way to be effective at policy,” they added. 

Meanwhile, as the Democratic Party struggles to determine its best path forward into November, Republicans have aggressively ramped up a campaign to court crypto advocates. 

On Monday, the GOP passed a draft party platform that explicitly embraced crypto, a first for a major American political party. 

For years, Washington’s crypto lobby has insisted that it doesn’t want blockchain tech to become a partisan issue—that the long-term security and health of the industry would be far better served by cementing its permanent status with bipartisan consensus. 

But while the Democrats’ choice for president—and that nominee’s potential treatment of the crypto industry—remains an enduring question mark, the fate of the industry should former president Donald Trump win in November is less ambiguous. 

“It does look pretty clear at this point that if Trump and Republicans are in charge, that’s definitely going to be a positive thing for the crypto industry,” Kristin Smith, CEO of the prominent crypto lobbying group the Blockchain Association told Decrypt.

Edited by Andrew Hayward