[klempner]

Congratulations, you've created a server that lets people have shells running as the user running telnetd.

You presumably want them to run as any (non root) user. The capability you need for that, to impersonate arbitrary (non-root) users on the system, is pretty damn close to being root.

[samlinnfer]

Well obviously each user just needs to run their own telnet daemon, on their own port of course.