The arrest of the enigmatic founder and Chief Executive Officer of Telegram, Pavel Durov, has sent shockwaves across the crypto market and has severely impacted the price of two digital assets linked to the instant messaging platform.

Durov was taken into custody by authorities from France after his private jet landed at the Le Bourget Airport in Paris last Saturday. His capture has sparked controversy and backlash from within the crypto community while a handful of world leaders and entrepreneurs have also made comments supporting him.

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Reports from French media outlets indicated that Durov was arrested under the orders of an agency that protects children from violence. Although he was born in Russia, the founder of Telegram olds dual citizenship in France and the United Arab Emirates (UAE).

Durov has not been formally charged but is still held in custody and being questioned by authorities. The investigation reportedly started in July and looked into serious allegations against the messaging platform and its leadership team.

These are some of the charges being brought up against Durov:

  1. Insufficient moderation of criminal activities on the platform.
  2. Failure to prevent the distribution of child sexual abuse material.
  3. Allowing drug sales and money laundering to occur through the app.
  4. Refusing to cooperate with law enforcement agencies.

A French prosecutor, speaking on condition of anonymity to the New York Times, confirmed that the arrest is linked to this ongoing investigation into criminal activity on Telegram. The messaging app, known for its encryption and privacy features, has long been a subject of scrutiny by governments worldwide due to its potential for misuse by criminal organizations and bad actors.

Market Reaction: Toncoin and Notcoin Take a Big Hit

Two cryptocurrencies associated with Telegram – Toncoin (TON) and Notcoin (NOT) – saw a significant drop in their price shortly after news of Durov’s arrest started to circulate. Toncoin is the native cryptocurrency that powers The Open Network blockchain, which has strong ties to Telegram and is used to reward content creators and developers.

toncoin drops after pavel durov arrest
Toncoin (TON) 7-day price chart – Source: CoinMarketCap

Meanwhile, Notcoin is the native digital asset that powers a popular Telegram-based tap-to-earn (T2E) game that has attracted the interest of millions of users across the world who earn rewards by simply tapping their device’s screens.

Right after Durov was arrested, the price of TON lost almost a quarter of its value and traded at around $5.6 per token. Although it recovered slightly a few hours later, it is still trading near those levels as of today.

The incident has resulted in the evaporation of $3 billion from the token’s total market cap according to data from CoinMarketCap.

Similarly, Notcoin has also shed a quarter of its value since the incident and has seen its price plummet from $0.012 to $0.009 per coin while its market cap has shrunk by nearly $300 million.

These wild swings in the price of both tokens indicate that market participants believe that the success and demand for NOT and TON are heavily dependent on the overall performance of Telegram.

Durov’s legal issues could spill over to the platform and lead to its ban in several key developed countries – a situation that would immediately affect its number of daily active users (DAUs) and other key metrics.

The TON Connection Dates back to 2019

To understand the full impact of Durov’s arrest on the cryptocurrency market, it’s worth assessing the background, history, and controversies associated with The Open Network (TON) and its relationship with Telegram.

TON was originally conceived by Pavel and Nikolai Durov as the Telegram Open Network, designed to bring blockchain technology and cryptocurrency payments to the messaging platform’s large user base.

However, the project ran into significant legal hurdles in 2019 when the US Securities and Exchange Commission (SEC) accused Telegram of illegally raising funds through an initial coin offering (ICO) of its proposed “Grams” token. In 2020, Telegram agreed to pay a fine of $18.5 million as part of a settlement with the SEC and abandoned the project.

Following this setback, the TON project was taken over by independent developers who used the open-source code to launch what is now known as The Open Network. Despite the official separation between the messaging platform and the blockchain project, it kept strong ties with Telegram in the minds of both users and investors.

Telegram has since integrated Toncoin payments into its app, allowing users to send TON to each other within the messaging platform. This integration has been a key driver of Toncoin’s growth and adoption, making the token particularly vulnerable to news affecting Telegram or its leadership.

Crypto Community Shows Support for Durov’s Cause

Durov’s arrest has prompted prominent figures within the crypto industry to weigh in and even call for his release. Justin Sun, the founder of the TRON blockchain, said that he would set up a $1 million decentralized autonomous organization (DAO) to raise funds to help Telegram’s founder fight for his freedom.

Meanwhile, the creator of the Ethereum network, Vitalik Buterin, also expressed his concerns about the implications of Durov’s arrest for the freedom of software development in Europe.

He reflected on the ongoing unease within the crypto and tech community about government overreach when it comes to blockchain technology, especially when they try to block, ban, or dismantle projects that they have failed to adequately regulate.

The Open Network (TON) blockchain’s official community group, the TON Society, issued a statement condemning the action as a “direct assault on a basic human right – the freedom of expression of everyone.” The group called on French authorities to respect Telegram’s “right to protect the freedom of expression, privacy of its users, and right to private life.”

Telegram itself has maintained a cautious stance, issuing a statement on its platform that emphasized its compliance with EU laws and ongoing efforts to improve moderation. The company stated: “Almost a billion users globally use Telegram as means of communication and as a source of vital information. We’re awaiting a prompt resolution of this situation.”

Support for Durov has also manifested in unique ways within the Telegram ecosystem. Some Telegram-based games, such as Notcoin and Hamster Kombat, have shown solidarity with the founder by introducing in-game features and stickers related to the situation. The TON Society has encouraged projects and community members to change their Twitter avatars to the “Resistance Dog” – a token used to symbolize “digital resistance.”

This show of support has had unexpected consequences in the marketplace including a surge in the price of the Resistance Dog (REDO), which increased 94% the week after Durov’s arrest. Its market cap currently stands at $67 million market cap and has rapidly become the fifth largest token on the TON network, excluding stablecoins.

It is worth noting that French authorities have not yet released concrete evidence that supports the charges against Durov. Indications that the founder of the messaging act has intentionally permitted the proliferation of criminal activities within the app may undermine his credibility and erode the support of both users and figures within the crypto industry.

Diplomatic Tensions Between Russia, the UAE, and France May Influence the Case’s Development

The arrest of Pavel Durov, a figure with ties to multiple countries, has sparked diplomatic tensions and drawn comments from various international actors. The Russian Embassy in France posted on Facebook that it was seeking to “clarify the reasons for the detention and to provide for the protection of Mr. Durov’s rights and facilitate consular access.”

The post noted a lack of cooperation from French authorities, hinting at potential diplomatic friction.

Maria Zakharova, spokeswoman for the Russian Foreign Ministry, questioned if Western human rights NGOs would remain silent on Durov’s arrest. These comments are considered sarcastic as multiple organizations criticized the country for its attempt to block the messaging app back in 2018.

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The United Arab Emirates, where Durov holds citizenship and where Telegram is based, also got involved in the narrative. The UAE Foreign Ministry stated that it was “closely following the case” and requested that France provide Durov with “all the necessary consular services in an urgent manner.”

These comments from multiple country officials highlight the complex geopolitical dynamics of regulating global tech platforms and the challenges faced by individuals like Durov, who operate across various jurisdictions.

As the legal proceedings against Pavel Durov unfold, the future of Telegram and its associated cryptocurrencies remains uncertain. The platform’s popularity, particularly in countries like Russia, Ukraine, and other former Soviet states, means that any significant changes to its operation could have far-reaching consequences for millions of users.

While the initial panic selling of Toncoin and Notcoin might subside as more information about the case becomes available, the incident highlights the potential volatility and regulatory risks associated with investments in this still nascent space.

Some analysts have drawn parallels between the current situation and the legal troubles faced by Binance CEO Changpeng Zhao (CZ) earlier this year. In that case, Binance’s BNB token experienced a sharp decline followed by a strong recovery once the market had absorbed the news of CZ’s legal settlement. Whether Toncoin and other Telegram-associated tokens will follow a similar trajectory remains to be seen.