By Suvashree Ghosh, Ryan Weeks and Emily Nicolle, Bloomberg
Compiled by: Felix, PANews
The detention of Telegram founder Pavel Durov in France has caused a stir in the crypto venture capital world, some of which have invested in digital tokens closely associated with the messaging app.
Pantera Capital Management, Animoca Brands and Mirana Ventures are among more than a dozen institutions that have invested in Toncoin, a blockchain used by Telegram to process instant payments and other transactions. Pantera, one of the largest crypto venture capital funds, invested more than $100 million in Toncoin earlier this year, people familiar with the matter said.
What attracted these funds was a fascinating crypto concept: Telegram would evolve into a digital asset "super app" similar to WeChat, with its 900 million users relying on Toncoin for everything from payments to playing blockchain games. From February to early July this year, the token surged fourfold, and the TVL on its blockchain TON once exceeded $1 billion.
But Durov's detention, accused of not doing enough to combat crime on Telegram, exposed the risks. Durov was charged on August 29 with participating in the distribution of child pornography and other crimes such as drug trafficking on the app. Telegram said in a statement that it complies with European law.
After Durov was arrested outside Paris on August 24, Toncoin plunged by about 20%, but later recovered some of its lost ground. According to DefiLlama data, TON's TVL has fallen to $573 million.
Usage rate drops
This year, the TVL of the TON network has dropped sharply
“Most investors believed that the app itself would greatly promote and drive adoption of the Toncoin network,” said Lasse Clausen, founder of crypto venture capital firm 1kx. “What’s happening now is that a black swan event has happened to the company itself and its founder, which may raise some questions about the future.”
Venture capitalists who poured money into Toncoin, often with agreements not to sell tokens for at least a year, are now trying to assess whether France’s move against Durov will cause users to flee Telegram, an app popular in crypto circles in large part because of its ultra-light-handed regulatory approach that has landed him in legal trouble.
Pantera called Toncoin its largest investment, but did not disclose the amount. The TON Foundation, which manages the blockchain, said in an email that it has never raised funds. Animoca Brands did not comment on its investment, and Mirana Ventures did not immediately respond to inquiries.
Some Toncoin supporters saw an “opportunity.” DWF Labs, a crypto market maker that invested in the token, spent “millions” of dollars buying Toncoin on the open market after Toncoin’s price plummeted, said Eugene Ng, co-founder of DWF Labs.
Token Trading, Liquidity
Over-the-counter investments in projects like TON by venture capital firms and other crypto funds are called "token sales" because investors receive tokens rather than traditional shares. To achieve these goals, venture capitalists often set up separate vehicles called liquidity funds, which are designed to hold assets for shorter periods of time. Because many token sales are conducted one-on-one over the counter, there are no reliable estimates of the popularity of tokens.
Tokens have several advantages for VCs and their investors, most notably that they often involve faster exits. A common structure is that tokens begin to unlock after 12 months, after which investors can gradually sell them. The volatility of tokens also gives backers a more comprehensive understanding of the project's progress, said Lasse Clausen, founder of 1kx.
Token sales can also involve deep discounts. Pantera bought Toncoin at a 40% discount to market value, according to a person familiar with the matter, who asked not to be identified because the terms of the deal are confidential. The investment is still profitable at an average price of $6.32 when the deal was announced in May.
Toncoin's gains this year have partially fallen back
The person familiar with the matter said Pantera’s lock-up period is one year, after which it can sell Toncoin in batches over several years.
Another side effect of token investing is that the assets are extremely volatile: if an investment goes wrong, it will be immediately apparent. Funds typically mark their holdings to market on a regular basis, meaning that a significant drop in price is immediately reflected in reports to limited partners.
Nothing illustrates this risk better than the collapse of Do Kwon’s TerraUSD stablecoin project in May 2022. Just a few months earlier, investors including Three Arrows Capital and Jump Crypto had purchased over $1 billion of Luna, a token used to stabilize TerraUSD. When TerraUSD collapsed, Luna became worthless. Soon after, Three Arrows went bankrupt, setting off a cascading collapse across the crypto industry.
Related reading: The founder of Telegram was suddenly arrested, what about the founders of other leading encryption projects?
