Unpacking crypto’s Telegram situationship
The arrest of Telegram CEO Pavel Durov in France has only amplified crypto’s centralization problems
Telegram CEO Pavel Durov | Steve Jennings/Getty Images for TechCrunch/"577180975RR090_TechCrunch_D" (CC license)
Today, enjoy the Empire newsletter on Blockworks.co. Tomorrow, get the news delivered directly to your inbox. Subscribe to the Empire newsletter.
A crypto situationship
Crypto is full of paradoxes. Telegram is a big one, and the arrest of CEO Pavel Durov in France over the weekend has only amplified it.
On the technology layer, crypto is about as binary as you can get. You either have the private key to sign the transaction or you don’t.
The same can’t really be said for centralized stablecoins. Backdoors baked into its Ethereum and Tron smart contracts allow the Tether team to freeze, destroy, blacklist and effectively reverse USDT transfers, even if they’re fully confirmed onchain.
Tether often uses those powers in response to law enforcement requests and, on occasion, Twitter posts. Circle doesn’t have all those powers over USDC, but it can and does freeze balances when authorities ask.
So, while the blockchains themselves may be robust and censorship-resistant, it’s generally accepted that some crypto projects aren’t so rigidly decentralized.
“Don’t trust, verify” is, however, a difficult standard to meet within the social layer. There’s an implicit demand to trust that humans won’t do something wrong. Multi-sigs, DAOs, foundations and key burning ceremonies are all intended to bridge that gap.
In the current state of the technology, users of layer-2 networks like Optimism or Arbitrum must trust that the signatories of their respective multi-sigs won’t collude to push malicious smart contract upgrades that would steal or otherwise jeopardize user funds. There’s nearly $39 billion in play in such situations.
That’s where Telegram finds itself: aligned with crypto’s anarcho-cypherpunk spirit, but centralized to the point that trust is baked into the product.
The non-open source Telegram is jam-packed with trust assumptions. Still, it’s the default messaging app for many top crypto exchanges, protocols and other token projects.
While there is an option to turn end-to-end encryption on for specific chats, the functionality is not enabled by default and is only possible for one-on-one conversations — and never group chats.
“The practical impact is that the vast majority of one-on-one Telegram conversations — and literally every single group chat — are probably visible on Telegram’s servers, which can see and record the content of all messages sent between users,” cryptography expert Matthew Green wrote in a Sunday blog post.
Also sitting on Telegram’s servers: metadata about who uses the app, which channels they use, who they communicate with and exactly when, as is the case with most other social networks and private messengers, Green explained. WhatsApp has also been caught with less than optimal privacy features involving metadata, as recently as January.
WIRED’s extensive reporting from 2023 previously confirmed that “Telegram has the capacity to share nearly any confidential information a government requests. Users just have to trust that it won’t.”
The circumstances of Durov’s arrest aren’t totally clear. He was reportedly arrested in connection with a preliminary investigation into potential criminality resulting from a lack of cooperation and moderation on the app.
There is evidence to suggest that Telegram does indeed take down illegal content, but not to the same degree as Facebook and TikTok.
The lore of Durov goes that he’s a fighter for free speech. It’s precisely that vibe that aligns Telegram and Durov with the crypto space. Durov’s public persona proves that he won’t bow to requests from the Matrix, or at least, not every request.
Crypto needs allies, and Durov and Telegram are some of its highest-profile supporters right now. With 900 million active users, there’s clearly a lot of trust, and sensitive data, on the line with whatever happens with Durov.
It could be time to revert back to crypto’s natural state — decentralization maximalism. That includes the messaging apps we use.
— David Canellis
Data Center
- TVL on TON has halved in August, from $765 million to $390 million right now. The price of TON has only slipped 17%.
- TON users are currently paying about $500,000 per week to use the chain. Solana users last week paid $5 million, per Token Terminal.
- BTC and ETH are both flat over the past day but up 9% and 6% in the past week, respectively. (BTC: $63,840; ETH: $2,740).
- Ethereum’s entry and exit validator queues are quiet, with only 67 waiting to join and four to leave.
- Average bitcoin transaction fees have normalized to $0.64 after spiking to over $7.60 following the launch of staking protocol Babylon.
Not so fast
Perhaps we can blame David for jinxing us, because we’re about to talk about an SEC case right after his wonderful reporting on the number of SEC cases filed this year.
Judge William Orrick, who’s overseeing the SEC’s case against Kraken, denied the crypto exchange’s attempt to dismiss the suit.
The entire ruling is a mixed bag. The SEC won certain arguments while Kraken scored a few points as well. The case, however, is still definitely open.
It’s a bit like what we’ve seen in other cases — including Ripple and Coinbase — and that’s not necessarily a bad thing.
“The SEC has plausibly alleged that at least some of the cryptocurrency transactions that Kraken facilitates on its network constitute investment contracts, and therefore securities, and are accordingly subject to securities laws,” Judge Orrick said, tossing out Kraken’s previous argument.
Kraken tried to argue that it didn’t need to “come in and register” because it didn’t offer or sell securities on its platform, and therefore didn’t fall under the SEC’s jurisdiction. We’ve also heard firms like Robinhood complain that registering is not that easy.
The SEC originally claimed that a group of tokens on Kraken’s platform were securities. And, yes, we’ve seen these tokens named in other lawsuits as well. (See here and here.)
The eleven OGs are ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL. However, Orrick narrowed his comments to just solana and algorand.
Judge Orrick pointed out that Kraken may have a point in arguing for a “stricter understanding of what qualifies as an investment contract,” citing both the Ripple and Terraform cases. Llast summer, the aforementioned mixed bag ruling in Ripple declared that some transactions fell under Howey’s definition of a security, while others didn’t.
The SEC, the judge said, has an “inconsistent manner of discussing the assets in question.”
“Sometimes the SEC strays into alleging that the crypto assets themselves — as in, the individual tokens bought, sold, and traded on Kraken’s platform — are investment contracts…The SEC confuses its case by referring to the assets at issue as ‘crypto assets securities’ throughout its complaint. But this is a semantics error that does not obscure the SEC’s theory of liability,” he wrote.
Marco Santori, Kraken’s chief legal officer, said that the ruling is a win for the exchange because Judge Orrick ruled that “none of the tokens trading on Kraken are securities.”
“I do not understand the SEC to be alleging that the individual cryptocurrency tokens in which Kraken enables transactions are themselves securities,” Orrick wrote. So instead the focus moving forward will be on the circumstances around the sales themselves.
“The SEC unqualifiedly lost on this ‘tokens are securities’ theory, and will not be permitted to rely on it going forward. Instead, it will need to prove, for every alleged transaction on Kraken, that the Howey Test factors are satisfied. They aren’t, and we look forward to proving this in discovery. Kraken will fight and Kraken will win,” Santori continued in a thread on X.
So grab some popcorn and sit tight. We’re in for another couple of months of uncertainty as courts and judges continue to grapple with what exactly makes a security in crypto. We’re all ears.
— Katherine Ross
The Works
- Authorities in Thailand raided a bitcoin mine after power outages, AFP reported.
- Former President Donald Trump’s push for bitcoin “made in the USA” could put pressure on Bitmain, Bloomberg reported.
- A US trustee objected to FTX’s proposed reorganization plan, arguing against the proposed distribution scheme’s ‘unequal treatment’ of creditors.
- CoinShares noted that Bitcoin ETFs saw inflows of $543 million last week,
- Hong Kong’s SEC found “unsatisfactory practices” at some crypto firms vying for a license.
The Riff
Q: Do you trust your messaging app?
Heck no.
Is it gonna stop me from using it? Also heck no.
Look, we’re still stuck in the era of corporate data profiteering. In turn, these companies gaslight you into thinking it’s okay because then they don’t have to charge you for using the service. (Crypto fixes this, obvs.)
As a journalist, I’m perhaps a little more skeptical than the Average Joe when it comes to secure communications. Signal, in the circles I run in, seems to be one of the more trusted apps. And, to be fair, it’s open-sourced and run by a nonprofit. But it’s a unicorn.
While I’ll always inherently be skeptical of messaging apps, I can admit that perhaps I’m just paranoid. Maybe I should pick up a few pigeons to keep in touch with sources.
— Katherine Ross
Katherine’s spot on. You shouldn’t trust them.
Privacy is a non-negotiable human right. But to her point, we’ve traded the bulk of our online privacy away for free social media and messenger apps.
On the day-to-day surface level, it never really comes up. When it can get weirdly Orwellian are the times you find yourself self-censoring.
Perhaps it’s avoiding Googling ideas for wedding rings or birthday gifts — to prevent your partner from receiving ads for the very same fluffy white Ugg Boots you’re buying them.
That’s the slow creep of dystopia coming on. Do those pigeons also deliver Amazon packages?
— David Canellis
Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.
Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.
The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.
