Note that no authentication is done. The user simply logs in as key="Telnet # @IP", where # is used to distinguish between simultaneous connections from the same IP. You can (and probably should) re-assign client.key after authenticating the user, but to avoid conflict with BYOND keys, you should include the "@" symbol somewhere in the key.
One of the interesting things about this feature is that it parses HTML (and CSS) and displays the result on the telnet terminal, just like in Dream Seeker. Right now, it is assumed that the user has an 80 column terminal that supports ansi color codes, but eventually, this will be adjusted dynamically.