The recent arrest of Telegram founder Pavel Durov has sent ripples through the crypto venture capital sector, where major players have heavily invested in Toncoin, a digital token closely tied to the messaging app.
Among the firms that have invested in Toncoin are Pantera Capital Management, Animoca Brands, and Mirana Ventures. Pantera, one of the largest crypto VC funds, reportedly invested over $100 million in Toncoin earlier this year, according to a source familiar with the matter.
The investments were fueled by the belief that Telegram could evolve into a “super app” for digital assets, similar to China’s WeChat. With 900 million users, Telegram was envisioned as a platform where Toncoin would be used for a range of activities, from payments to blockchain-based gaming. The token’s value surged fourfold between February and early July, with assets locked on its blockchain, TON, briefly exceeding $1 billion.
However, Durov’s arrest on charges of complicity in the distribution of child sexual abuse material and other criminal activities like drug trafficking has exposed the vulnerabilities associated with such investments. Durov was detained outside Paris on August 24, and since then, Toncoin’s value has dropped by approximately 20%, though it has recovered some losses. The total value locked on the TON blockchain has decreased to $573 million, according to data from DefiLlama.
“The majority of investors believed the app itself would drive adoption of the Toncoin network,” said Lasse Clausen, founding partner at crypto VC firm 1kx. “Now, with this unexpected event affecting the company and its founder, there are new concerns about the future.”
Total value locked (TVL) is a key metric indicating the extent of a blockchain’s use for its intended purposes, whether gaming or decentralized finance.
Venture capital investors who backed Toncoin, often with agreements to hold the tokens for at least a year, are now reassessing the impact of Durov’s legal troubles on Telegram’s user base. Telegram’s popularity in crypto circles largely stems from its lax oversight, a factor that contributed to Durov’s current predicament.
Pantera Capital has described Toncoin as its largest investment but has not disclosed the exact amount. A spokesperson for the firm, which manages nearly $5 billion, did not respond to requests for comment. The TON Foundation, which oversees the blockchain, stated via email that it has never raised funds. Animoca Brands declined to comment on its investment, while Mirana Ventures did not immediately respond.
Despite the turmoil, some Toncoin investors see potential opportunities. DWF Labs, a crypto market maker and Toncoin investor, spent “millions” over the weekend purchasing the token after its price plummeted, according to co-founder Eugene Ng.
In the crypto world, such investments are known as “token deals,” where venture capitalists receive tokens instead of traditional equity. These deals are unique to the cryptocurrency industry and often involve liquid funds, which are set up to hold assets for shorter periods. Due to their bilateral nature, reliable estimates for the prevalence of token deals are hard to come by.
Token deals offer several advantages, particularly the potential for quicker exits. Typically, tokens become unlocked after 12 months, allowing investors to sell them gradually. The token’s market fluctuations provide backers with real-time insights into the project’s performance, Clausen explained.
“If you’re a traditional venture investor dealing in equity, the maturity period is about eight to ten years. With tokens, you get a more immediate sense of how the company is performing,” he said.
However, token investments are also highly volatile. Pantera reportedly acquired Toncoin at a 40% discount to the market price at the time, still making the investment profitable based on the average price in May. The firm is subject to a one-year lockup, after which it can sell Toncoin in batches over several years.
The volatility of token investments means that losses can become apparent immediately. Funds typically mark their holdings to market regularly, so any significant drop is promptly reflected in reports to limited partners.
The risks of token investing were starkly highlighted by the collapse of Do Kwon’s TerraUSD stablecoin project in May 2022. Just months before its implosion, investors including Three Arrows Capital and Jump Crypto had invested over $1 billion in Luna, a token used to stabilize TerraUSD. When TerraUSD collapsed, Luna became worthless, leading to the bankruptcy of Three Arrows and triggering a series of failures across the crypto industry.
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