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Russia Considering Draconian Rules for Illegal Crypto Operations

Harsh new rules making many uses of digital assets punishable with fines or prison might soon become law in Russia. 

New draft bills setting out how Russia should regulate cryptocurrencies were sent to the country’s parliament, the State Duma, earlier this week. Although the official website for the planned legislation hasn’t been updated yet, the two documents have been published in the OrderCom Telegram channel and were confirmed as genuine by sources of Russian news outlet RBK. 

The legislative proposals were reportedly written by staff at the Digital Economy think tank and the Skolkovo business accelerator. They seek a new version of the bill on digital assets, which has been stuck in the Duma for more two years now, as well as crypto-focused additions to the country’s criminal code.

The first draft bill would regulate digital currencies in Russia. Or, to be more clear, prohibit the issuance of, and operations with, digital currencies in the nation. Even distributing information about such activities would be banned.

Individuals and companies would not be permitted to accept digital currencies as payment, except if they are inherited, distributed to the debtors of a bankrupt company or confiscated as a result of a court decision. People owning cryptocurrency should declare it at the tax agency, as well as provide information on how it was purchased.

The second draft would introduce a new article into the criminal code bringing sanctions for illegal operations with digital assets.

If passed, issuing digital assets in Russia without being approved for listing on a yet-to-be created register at the country’s central bank would see a company fined for up to two million rubles (nearly $28,000). The same level of penalty is suggested for organizing operations with digital assets and cryptocurrencies without approval, while individuals would face a fine of up to $2,800.

Buying crypto for cash or via a bank transfer from a Russian bank would be subject to a fine up to one million Russian rubles ($14,000) or up to seven years in prison, depending on the scale of the deal. Similar punishment would be in store for those who accept crypto for goods and services.

If such a business brings “especially large” profit or especially large damage to the citizens and the state, the proposal would put the person(s) involved behind bars for up to seven years, or even forced labor. Facilitating crypto purchases, if such operations somehow “brought significant damage” to the state or individuals or “especially large profit” to the operator, could lead to five years in prison.

The mentions of a central bank register suggests legislators are providing leeway for some officially sanctioned entities to issue and use digital assets, while most general operations would be banned.

According to the RBK report, Anatoly Aksakov, chief of the Duma Committee on Financial Markets, confirmed the authenticity of the documents, but said they had not been finalized.

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Ukraine Arrests Hacker Accused of Selling Personal Data, Crypto Wallet Info

A national law enforcement agency in Ukraine has detained a hacker it claims is responsible for the country’s largest known theft of personal data, cryptocurrency wallets and other information.

The Security Service of Ukraine (SSU) reported detaining a hacker, known as Sanix, allegedly known for selling a database with 773 million e-mail addresses and 21 million unique passwords on various online forums in recent years.

In addition to email logins and passwords, the database contained “PIN codes for bank cards, e-wallets of cryptocurrencies, PayPal accounts, information about computers hacked for further use in botnets and for organizing DDoS attacks,” the SSU said in its press release.  The stolen data belonged to people from different countries, including the European Union and the U.S., the agency claimed.

The agency seized “computer equipment with two terabytes of stolen information, phones with evidence of illegal activities and cash from illegal transactions,” including about $10,000 in Ukrainian hryvnias and U.S. dollars, the release said.

The seizures happened after SSU received a tip that Sanix is “probably a Ukrainian, a resident of [the] Ivano-Frankivsk region” and searched his home.

Sanix now faces criminal charges for unauthorized interference with computers and unauthorized sale or dissemination of information with limited access. According to the Ukrainian criminal code, a combination of these two can lead up to eight years of prison time. 

The breach was first reported in January 2019 by cybersecurity researcher Troy Hunt. Wired called it “a breach of breaches,” saying the 87-gigabyte database “claims to aggregate over 2,000 leaked databases that contain passwords whose protective hashing has been cracked.” 

The first batch of stolen data has been followed by several more “collections,” offered by Sanix as well as another hacker named Oxa, Forbes wrote at the time. The hackers offered “lifetime” access to the databases for modest amounts from $45 to $65. 

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Aggrieved Investors Mull Suing Telegram Over Canceled TON Blockchain Project

Investors in Telegram’s TON project are in discussion to sue the company after it abruptly shuttered the blockchain effort earlier this week, according to four individuals familiar with the situation. 

It’s not the ambitious project being shut down that upset investors but the options they were given: Take back 72% of their investment immediately, in accordance with a contract amendment from 2019, or loan the funds to Telegram for a year and get back 110% in April 2021.

Telegram spent $405 million from the $1.7 billion token sale proceeds developing both TON blockchain and its messaging app, but those expenditures brought zero value to the investors, said Vladimir Smerkis, head of crypto startup Tokenbox and one of the investors.

“We are considering filing a lawsuit, as the money [Telegram CEO] Pavel Durov spent on the project got investors nothing, while at least, it would be fair to talk about getting Telegram’s equity, for example,” Smerkis said.

In his estimation, about a half of the investors might be considering lawsuits at the moment, and about half as many will actually do it. Three other individuals who did not wish to be named, including another investor in TON and two funds who consulted with such investors, said potential litigation is being actively discussed. 

CoinDesk reached out to Telegram for comment on the potential lawsuits and comments by a former employee about the company’s financial status but did not hear back by press time.

“There are funds that are considering a class action against Telegram,” one of the investors told CoinDesk, though he said he does not plan to participate. 

Investors in the U.S., Europe and Russia are now discussing these potential lawsuits, he said.

“Many people are upset that the project is over. Knowing Durov’s business acumen, we hoped he would fight for the existence of TON, but apparently the risks he faced exceeded the upside he could get if the project was launched,” Smerkis added.  

There was a group of investors that “said they will be with Durov until the end,” Smerkis said. However, the end was announced earlier this week by Durov himself. “On the conference calls with other investors, I can see that people are unhappy and are planning to get their money back and later sue in order to either get more money back or some of [Telegram’s] assets,” Smerkis said.

Quitting it

The fate of TON had been hanging by a thread since Telegram lost in federal court to the U.S. Securities and Exchange Commission (SEC), which said its planned blockchain tokens, called grams, were unregistered securities. On Wednesday, the story came to a dramatic end: Durov, in an announcement, said the project is over

“For the last 2.5 years, some of our best engineers have been working on a next-generation blockchain platform called TON and a cryptocurrency we were going to name Gram,” Durov said, but “a U.S. court stopped TON from happening.” 

Blaming the U.S. regulators, which can “shut down any bank or bank account in the world” or “use its control over Apple and Google to remove apps from the App Store and Google Play,” Durov announced Telegram will stop developing TON. 

Some investors have already received 72% of their initial investments under option one and have no plans to make Telegram’s life any harder. Two of these investors,  including Anatoly Knyazev, executive director of the investment firm Exante, confirmed to CoinDesk their refunds had been received. 

“It was a venture investment, we fixed our loss,”  Knyazev said.

Another investor, BitScale Capital founder Zurab Kazhiloti, said he took the second option and loaned the money to Telegram to see what happens. 

“We can wait one more year. Pavel’s team has got us surprises before, so we believe in a positive outcome,” Kazhiloti said. 

His optimism goes even further than that because Bitscale Capital joined the community launch of a network based on the TON code, named Free TON, as a validator, he said. 

“We all are grateful to Nikolai Durov [Telegram’s CTO and Pavel’s brother] for the code he wrote. Not to launch it would be unreasonable,” Kazhiloti said, adding he hopes the network can attract many validators, services and users in future. 

Not everyone feels that uplifted. The head of a venture fund located in Eastern Europe consulted by some TON investors and who asked not to be identified, said investors in America and other regions believe getting back 72% of their investments does not make a “ton” of sense. 

“No venture fund wants to wait two years and then get back 72%. It’s better to lose the money altogether,” this person said.

The trust between Durov and Telegram’s investors can be seriously eroded, he added, because the company has been unpredictable in its decision-making and lacks clear two-way communication with itsinvestors. 

Some investors were especially insulted that Telegram did not offer them equity after they effectively funded the company’s messenger app, the fund manager said. Durov said during a court deposition that Telegram did not separate the resources it spent on the app from the ones it spent on the blockchain project. 

“They showed the investors their place: They don’t want all those various gram purchasers to become shareholders,” the fund manager said. “And it’s disrespectful. You take money from these people but you share the upside with others. You’re spending your investors’ money. Won’t you consider their interest?” 

The launch of Free TON also didn’t look good to many investors. Hinting on the possibility that Telegram might have given a green light to the project, the head of Vestor.In Partners investment firm Pavel Cherkashin wrote an op-ed in the Russian version of Forbes.

“Investors would support a crusade against the American justice system,” Cherkashin wrote. “What they were not ready for was that Durov would yell “Every man for himself,” jump ship and launch Free TON, repeating the same trick Vkontakte did,” he added, pointing out that Durov’s team started working on the Telegram messenger while employed by his first company, Vkontakte, which caused a conflict among the shareholders. 

Equity hopes

According to the fund manager, some investors are still hoping to negotiate an equity deal, but it’s not clear what the value of such equity would be (Durov has publicly rejected both subscription and advertising revenue models and had been funding Telegram out of his own pocket before the token sale). 

Yakov Barinsky, CEO of HASH CIB, an investment firm consulted by gram purchasers, told CoinDesk some investors had been expecting to turn their token allocations into shares in Telegram from the start, and they are not planning to let those expectations go.

“There is a group of investors who believe they deserve equity, and they are going to fight for it,” Barisky said.

Part of this fight might be taking money back now, he added. “Those with the most aggressive attitude believe if they take the loan offer, they will effectively lose the right to negotiate with Telegram based on the current agreement as they enter a new one.”

Pavel Durov has famously been unwilling to dilute his ownership of Telegram, and, according to company spokesperson Remi Vaughn, an equity distribution is definitely not on the table now. However, recent weeks show investors can apply enough pressure to influence Telegram’s strategy at least partly. 

After the first refund-or-loan offer was circulated, Telegram detailed new loan terms in an email on May 6. Investors would receive 72% of funds plus interest when Telegram repaid them sometime over the coming year, rather than the 110% previously agreed to. The company walked back these terms after pushback from the community, according to the investors. 

Anton Rosenberg, a former Telegram employee fired by Durov, said that if Durov has to return all the money he raised, Telegram will have no funds for its operations. 

“Telegram was running out of money in 2017 already, so the last two years it has been spending the TON investors’ funds,” he said. 

Now, with the pandemic and the global crisis, it will be quite hard to find an investor willing to buy Telegram, said Rosenberg.  

“Some investors are even discussing if Durov can just run away with the money – more as a joke, of course. And some are trying to figure out the chances to get back the entire investment amount via the court,” he said. 

A fund manager familiar with the TON investors in the U.S. told CoinDesk several investors were definitely preparing to take on Telegram in court. 

“Not sure that they will win. But it is America, so I am sure that they will sue!” he said.

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Sidestepping Telegram, Devs and Validators Launch Fork of TON Blockchain

Telegram’s blockchain network finally launched today – or, at least, a version of it. 

TON Labs, a startup that helped Telegram run the test network for the Telegram Open Network (TON), launched its own version of the blockchain Thursday, with the support of professional validators. Called Free TON, the fork comes after the group decided not to wait until Telegram is able clear the regulatory hurdles it faces before it can officially send TON live.

The initiative is supported by 13 validators and used code maintained by TON Labs. During a Zoom call livestreamed on YouTube, the “zero state file” of the new blockchain was generated, effectively marking its launch.

“The network must not be censored, it must go to the world,” TON Labs CTO Mitya Goroshevsky said on the call.

To distinguish itself from the original TON project, this forked version is named Free TON, and its tokens are called “tons,” not “grams,” as Telegram’s were dubbed.

Telegram did not reply to a request for comment on the initiative by press time. 

Telegram was not involved in the launch, according to Alexander Filatov, CEO of TON Labs. “It’s an independent launch of the open-source software,” he told CoinDesk. TON Labs is providing technical support for the code, while the team of (for now) 13 validators will be supporting the network. The code will be used under the GNU Lesser General Public License, version 2.

The original TON had initially been scheduled to launch in October 2019, but was delayed after the SEC sued the messaging app company for allegedly selling unregistered securities. An injunction to halt the project was granted by a U.S. court in February, making the second launch deadline of April 30 unfeasible.

Devs in

However, as the code for TON is publicly available on GitHub, it’s technically possible to launch it without Telegram’s participation. “This project has its own community, its own idea, its own ideology. Not launching it would be a mistake,” said Konstantin Lomashuk, head of P2P, a Moscow, Russia-based blockchain startup and a Free TON validator. 

It’s not a mainnet, but it’s not a testnet, either, said Sergey Vasilchuk, founder of the Kiev, Ukraine-based EverStake, also a validator. “We’re trying to launch the alpha version, see how this software works in real life,” Vasilchuk said. Like the Kusama network is for Polkadot, Free TON is serving as a proving ground for the tech before it can be launched in full, he explained. 

“The way we see it is as a testnet that has the real distribution but might – and will possibly be – rolled back to the genesis state at any time if there are vulnerabilities in the code and black hats [malicious hackers] decide to exploit them on the live chain,” said Hendrik Hofstadt, CEO of the Berlin-based staking startup Certus One. 

Currently, the 15 entities acting as validators include EverStake, P2P, Berlin, Germany-based Certus and other professional validation-as-service startups that are already supporting networks like Cosmos, Loom, EOS and Tezos. 

There are also three cryptocurrency exchanges in the role, according to a list of validators shared with CoinDesk, including Kiev-based Kuna, London-based CEX and Hong Kong-based HitBTC. They won’t list ton tokens at this point, and will only act as validators, Filatov told CoinDesk. 

Some of the validators came from the TON Community Foundation (TCF), also supported by TON Labs. The foundation launched its own testnet for TON earlier this spring. However, Filatov said “TCF didn’t become a truly international movement,” and thus didn’t succeed in leading the blockchain launch. However, its members can join the new network, too, he added. 

“There is absolutely no technical reason now for somebody to join this network (except the common reason for all altcoins – to get some coins),” CTF cryptographer Alexey Pryanishnikov wrote in a chat while watching the launch livestream.

From launch, each validator will receive 380,000 ton tokens to stake and start producing blocks for the proof-of-stake blockchain. There will be a limited supply of 5 billion tokens, as was the plan for the original TON blockchain. Out of those, 85% will be distributed to “Free TON partners and users,” 10% to developers and 5% to validators, a press release says.

“We expect the TON network to mature quickly and transition into a mainnet state over time,” Hofstadt said, adding that crypto exchanges will later list ton tokens, so that early participants will ultimately be rewarded. 

Investors out

As a fork of TON, Free TON will have nothing to do with Telegram’s obligation to distribute tokens to investors in its $1.7 billion token sale, the participants say. 

“It’s also very cool to launch a network with just validators and developers and having the vast majority of tokens controlled by a community pool, as opposed to investors. It’s a great experiment,” said Brian Crain, co-founder and CEO of staking firm Chorus One.

Hofstadt echoed the sentiment, saying: “We’re very excited about TON because it is one of the first networks that is launching with a token distribution that is not centralized around early stage investors and VCs.”

Telegram’s investors are unlikely to get their tokens. The firm sent them a letter last week, just before the launch deadline, saying the event has been pushed back to 2021. Five days later, Telegram fired off a new letter saying that the token distribution, awaited by the investors for over two years, is now not on the table

Those who funded TON now can opt to either take 72% of their investments back now, or lend their funds to Telegram for a year to get a return of 110% in April 2021. U.S. investors, though, have only offered the first option.

On Wednesday, the deal was further detailed. According to the Russian publication The Bell, Telegram sent over the terms of the loan, offering the 52.77% annual interest rate. It seems Telegram is reserving the option to repay investors at any time, meaning an investors would get 72% plus interest for the time the company utilized the loan, but with a minimum of three months.

Sergey Solonin, founder of the Russian e-payment firm QIWI and TON investor, told CoinDesk there’s no point in lending money to Telegram on such terms.

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Telegram Withdraws Offer to Repay Investors With Gram Tokens

Telegram won’t be repaying its investors in gram tokens after all.

The messaging platform told investors in its TON blockchain project Monday that it would not be paying investors back in tokens, and it was looking to buy American investors out immediately.

Telegram, which has twice delayed the launch of its new network, is contractually obligated to pay investors back 72% of their investments immediately after missing an April 30 launch deadline, but has offered to pay investors 110% of their investment if they wait a year for the network to go live as it grapples with the U.S. Securities and Exchange Commission (SEC) over whether its token sale violated federal securities law. 

The company currently hopes to launch in April 2021, pending the outcome of this case.

Just last week, Telegram left the door open to investors being repaid in grams, writing if investors agreed to wait that year and leave their money with Telegram as a loan, they could get repaid in TON’s native tokens, dubbed grams, “or another cryptocurrency,” according to the previous communication by Telegram. However, the crypto option has now been deemed infeasible. 

“Unfortunately, based on more recent discussions with relevant authorities and our counsel, we have made the difficult decision not to pursue an option involving grams or another cryptocurrency due to its uncertain reception from the relevant regulators,” said the letter, which was shared with CoinDesk.

The loan option is still there, the letter continues, but the payment will not be in crypto.

Telegram is only making the offer to its non-U.S. customers. American customers will be required to accept the 72% payouts, the letter said. 

“This offer is only being made available to offerees outside the United States who are not U.S. persons within the meaning of Regulation S under the U.S. Securities Act of 1933,” Telegram wrote.

The investors are asked to reply by 5:00 p.m. London time on Tuesday, May 5, 2020, to indicate whether they are located outside the United States.

“We intend to ask you to return signed documents in relation to this new transaction by Monday, May 11, 2020, so we need your initial response to this email as soon as possible,” the letter ends. 

Telegram did not address its intention to possibly sell equity to raise the funds it needs to repay investors in Monday’s letter. Spokesperson Remi Vaughn previously told CoinDesk that investors in the TON project itself won’t receive equity as repayment, but that the company might raise cash through equity sales.

Telegram, which raised $1.7 billion in 2018 for its TON blockchain, has already delayed TON’s launch once due to regulatory concerns. The network was originally set to go live on Oct. 30, 2019, but was delayed to April 30, 2020 after the SEC sued Telegram on allegations of violating securities law last year. The latest delay comes after a judge upheld a preliminary injunction prohibiting the issuance of gram tokens.

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