How Telegram silently crept its blockchain past regulators


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As published on Decrypt

Regulators are furious with Facebook’s Libra. Congress has drafted bills to ban it, the French Finance Minister blocked the “development of Libra on European soil”, and Yves Mersch, an executive of the European Central Bank, said in a speech earlier this month it “could reduce the ECB’s control over the Euro”.

All this focus on Libra has diverted attention away from the Telegram Open Network, or TON, Telegram’s upcoming Proof-of-Stake network that promises to integrate blockchain payments to the 365 million users of Telegram’s encrypted messaging app by the end of October.

So how are regulators dealing with this? After contacting over a dozen regulatory authority and central banks, Decrypt learned surprisingly little. A spokesperson from the German Central Bank put it best:

“We do not possess any specific information on TON. That’s why we cannot comment on this app.”

“Given we have not had the opportunity to examine the technology in-depth, we are not in a position to offer comment,” added a spokesperson from the Office of the Privacy Commissioner of Canada.

“It looks like another crypto experiment, not really an issue for regulators/ overseers at this stage,” said a spokesperson from the European Central Bank.

“There is not much info indeed,” said a spokesperson from the European Data Protection Supervisor, a regulatory body on privacy.  “Telegram will have to apply the GDPR; no specific TON regulation is needed here. Telegram will have to fulfill all compliance obligations,” he said.

These responses, which range from “no comment” to, “We have nothing to add ”, are worrying signs for a financial network about to be delivered by one of the largest social media networks in the world to 300 million people.

Mitja Goroshevsky, CTO of TON Labs, a company that’s building developer tools for the upcoming TON network, said that the lack of interest from regulators is because the Facebook-led Libra Association is quite different than TON.

The Libra Association, run by a smaller number of payment institutions including PayPal and Uber, isn’t decentralized at all—“you can’t even call it a cryptocurrency,” Mitja told Decrypt. TON, on the other hand, isn’t trying to be a payment institution without a banking license; “it’s just a decentralized blockchain.”

Oleksander Synytsia, a lawyer at Juscutum, a Ukrainian law firm that specializes in blockchain, agreed, sort of: “The existence of Telegram Open Network itself does not violate or challenge any current laws,” he told Decrypt, perhaps explaining why TON hasn’t caused the same furor as Libra. But Synytsia said that, upon its release, TON will “definitely encounter with strong “resistance” from authorities who are aiming to protect the well-established financial system.”

Blockchain critic David Gerard agreed with Synytsia: “A Telegram cryptocurrency won’t be as systemic as a Facebook cryptocurrency,” he told Decrypt. “But TON raises a lot of the same questions as Libra.”

Pavel Prigolovko, Vice President, Strategy, TON Labs, told Decrypt that regulation hangs on  TON’s decentralization.

“If there is one person who manages the payment system, it is this person who must comply with all the laws and regulations of the regulators, and if there is no central agent, then there is no one to present the requirements to,” he said.

To stay decentralized, Prigolovko said that TON has to switch from a model where all the validators are controlled by TON itself during the launch, to one where the community controls the majority of the validators. “This transition depends on the technical availability of the large Gram holders to become validators. There are quite a few technical challenges to become a validator, like setting up a reliable infrastructure with proper processes, scripts [and] monitoring,” he said.

“At TON Labs, we have done everything to facilitate the process and developed an industrial-grade solution to run the validation process – the solution will be available on day one,” he said.

But what else might cause ire from regulators?

Mitesh Shah, CEO of blockchain analytics company Omnia Markets Inc, who follows crypto regulatory issues, said that Telegram has given little information about where and how user data is stored. “There are more users here than on any other chain, and having it stored in a proper place is one of the largest concerns,” Shah told Decrypt. With a novel, untested protocol, launching to more people than ever before, TON is risky business.

When Telegram goes live, users are “automatically going to be linked to a wallet whether they want to or not”. Goroshevsky noted that Telegram would require some KYC functionality, but neither the most recent whitepaper nor the documentation outline how this would work. Shah said Telegram had not yet explained whether TON will use available KYC protocols or if they will use their own protocols.

But Steven Stalinsky of the Middle Eastern Media Research Institute told Decrypt last month about concerns that TON would be exploited by terrorists, who already use Telegram to promote violent campaigns. Even if KYC was implemented, Telegram wouldn’t be able to prevent subversive groups from using fake accounts to hide the transfer of money.

TON Labs’ Goroshevsky pushes away concerns about the storage of user data:

“TON is not collecting user data hence it is not going to store it. TON is a decentralized blockchain and as any such blockchain, it will be fully open and transparent. And of course, that means all transaction details will be public, like on any other public ledger,” he said.

No matter the technology, as the U.K.’s Information Commissioner’s Office told Decrypt,”Where personal data is processed, data protection law applies. This is the case irrespective of the technology concerned or how it is used.”

Shah told Decrypt that regulators will probably start taking TON, which has always talked a big game, seriously when it launches. Once the dust settles, Shah said regulators will step in to “force TON to answer some of the concerns around its user data…and how they will monitor the transactions on its network.” Blockchain critic David Gerard agreed; Gerard expects regulators to clamp down on the international movement of Grams.

Shah also raised an eyebrow over Telegram’s “heavy affiliation” with crypto exchange BlackMoon. The exchange, whose co-founder, Ilya Perekopsky is Telegram’s vice president,  claims it will be one of the first exchanges to list Grams, and its Chief Operating Officer, Sergey Vasin, told Finance Magnates it has a “truly unique offer” of a bank card that can be used to buy Grams. “I think regulators are going to have their hands full trying to ensure that, while [BlackMoon] have been affiliated [with TON], they will act as a separate entity, especially if that’s going to be the primary marketplace to sell Grams.”

But if regulators don’t step in, Shah said that the investors will. If TON isn’t up to scratch, they’ll want their $1.7 billion back.

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