Telegram 'Black Swan event' shows risk in crypto deals as Durov detained

By Suvashree Ghosh, Ryan Weeks and Emily Nicolle
 

The detention of Telegram founder Pavel Durov is reverberating through the crypto venture capital sector, where some of the biggest players have invested in a digital token closely linked to the messaging app. 
 

Pantera Capital Management, Animoca Brands and Mirana Ventures are among more than a dozen firms that invested in Toncoin, whose blockchain is being used on Telegram to handle things like instant payments. Pantera, one of the largest crypto VC funds, put more than $100 million into Toncoin earlier this year, a person with knowledge of the matter said. 

 

The funds were drawn by a notion that’s bewitched crypto: that Telegram would morph into a digital-asset “super app” akin to China’s WeChat, with its 900 million users relying on Toncoin for everything from payments to playing blockchain-based games. The token surged fourfold from February to early July and assets locked on its blockchain, TON, briefly surpassed $1 billion. 

But Durov’s detention on allegations he didn’t do enough to combat crime on Telegram laid bare the risks. Durov was on Wednesday charged for complicity in the spread of sexual images of children and other crimes including drug trafficking on the app. Telegram said in a Sunday statement that it abides by European laws. 

Toncoin plunged roughly 20 per cent after Durov was seized outside Paris on Aug. 24 before paring some of those losses. Total value locked on TON has fallen to $573 million, according to data provider DefiLlama. 

“The majority of the investors thought that obviously the app itself is going to foster and promote, or at least seed, the adoption of the Toncoin network,” said Lasse Clausen, founding partner at crypto VC firm 1kx. “Now we have a case where a black swan event happens to the company itself and its founder — that might raise some questions about the future.”

Total value locked, or TVL, is an indicator of how much a blockchain is being used for its stated purpose, be it gaming or decentralized-finance applications.

VC investors who poured money into Toncoin — often with agreements not to sell for at least a year — are now trying to assess whether France’s move against Durov could cause users to flee Telegram. The app became popular in crypto circles in large part because of the ultra-lax approach to oversight that landed him in legal trouble.

Pantera has described Toncoin as its largest investment, without providing an amount. A spokesperson for the Menlo Park, California-based firm, which oversees almost $5 billion, didn’t respond to emails and calls seeking comment. The TON Foundation, which governs the blockchain, said in an email that it has never raised money. Animoca Brands didn’t comment on its investment and Mirana Ventures didn’t immediately respond to an inquiry. 

Some Toncoin backers see an opportunity. DWF Labs, a crypto market maker which invested in the token, spent “millions” of dollars buying Toncoin in the open market over the weekend after its price crashed, co-founder Eugene Ng said. 

Token Deals, liquid funds
 

Over-the-counter investments by VCs and other crypto funds into projects like TON are referred to as “token deals” because investors receive tokens instead of traditional equity, and they are unique to the cryptocurrency universe. To carry them out, venture capitalists often set up separate vehicles known as liquid funds designed to hold assets for a shorter period of time. Because many token deals are done bilaterally, there aren’t any reliable estimates for their prevalence. 

There are several advantages for VC firms and their investors, most notably that tokens tend to involve quicker exits. One common structure is that the tokens start to become unlocked after 12 months, after which the investors can gradually sell them off. Fluctuations in the token also give backers a more up-to-date picture of how a project is doing, said Clausen. 

“If you’re a traditional venture investor with equity, maturity takes about eight to 10 years, and so you really have many years where it’s a company just kind of doing their thing,” he said.

Token deals can also involve large discounts. Pantera bought Toncoin at 40 per cent below the market price at the time, the person familiar said, asking not to be named because the terms were confidential. Using the average price of $6.32 for May, when the deal was announced, the investment would still be comfortably in the black. 

Pantera is subject to a one-year lockup, after which it can offload Toncoin in batches over several years, the person said. 

The flip side of token investing is that the assets are extremely volatile — and when an investment goes bad, it’s immediately visible. Funds typically mark-to-market their holdings on a regular basis, meaning a big drop shows up right away in reports to limited partners. 

Few instances illustrate this risk better than the collapse of Do Kwon’s TerraUSD stablecoin project in May 2022. Just months before, investors including Three Arrows Capital and Jump Crypto had bought more than $1 billion of Luna, a token used to stabilize TerraUSD. When TerraUSD imploded, Luna became worthless. Three Arrows went bankrupt shortly after, touching off a daisy chain of failures across the crypto industry.