How Kwon went from Crypto King to fugitive to prison: QuickTake

South Korean Do Kwon presided over one of the largest-ever arrests in the volatile crypto sector. His Terraform Labs Pte created the TerraUSD stablecoin, which was intended to have a constant value of $1 through a complex mix of algorithms and incentives for traders with a sister token, Luna. Their combined value rose to over $60 billion until confidence in the system evaporated in May 2022, forcing investors to flee and deny the tokens of value. With Kwon’s whereabouts unclear, South Korea issued an arrest warrant based on allegations, including capital markets law violations. He denied any wrongdoing or being “on the run.” But he became the subject of a red alert from Interpol and was arrested in Montenegro in March 2023. The US, which accused him of fraud, and South Korea are asking for his extradition.

Kwon, 31, left Stanford University in 2015 with a computer science degree, according to his LinkedIn profile. He held positions at Apple Inc. and Microsoft Corp. before falling, as he puts it, “down the crypto rabbit hole”. Kwon co-founded Terraform Labs in 2018, one of many young programmers who saw blockchain technology as a gateway to financial revolution. His project of creating a stable digital currency outside mainstream finance and regulators provoked a legion of supporters, as well as critics who said it was a doomed Ponzi scheme. Kwon was brash and belligerent at times, fooling online naysayers. He told a critic that the Luna community was not as “poor as you are broke.” When his project imploded, he said he was “heartbroken at the pain my invention has caused you all”.

2. What happened to the TerraUSD stablecoin?

TerraUSD, an algorithmic stablecoin, and its sister token Luna rose in value during a pandemic-era crypto boom. TerraUSD was not backed by dollars or other assets, but instead had to be worth $1 because it could be exchanged for $1 worth of Luna, which in turn was meant to increase in value as the Terraform Labs network grew in value. TerraUSD grew in popularity when Kwon started the Anchor Protocol, which offered an eye-popping 20% ​​interest rate on TerraUSD deposits. But the whole edifice came crashing down as investor confidence faded amid a virtual coin sell-off. On May 7, 2022, the TerraUSD peg began to buckle as the price fell to 99 cents. Terraform Labs drastically increased Luna’s supply to restore the link, driving the price of the latter down. (It was once worth more than $100.) A Bitcoin reserve worth a few billion dollars failed to stop the spiral: Within days, TerraUSD and Luna were practically worthless. Korean authorities are trying to trace the whereabouts of millions of dollars in assets.

3. How did Kwon get on the run?

The implosion of TerraUSD shook up digital tokens worldwide, further wiping out the $2 trillion crypto market value from a peak in November 2021. That caught the attention of regulators from the US to Asia, as well as law enforcement in South Korea, where some 280,000 people had bought Luna. Lawyers for Luna investors filed complaints with South Korean prosecutors alleging that Kwon was guilty of fraud and illegal fundraising. On September 14, 2022, prosecutors said an arrest warrant had been issued for Kwon and five others on charges including capital markets law violations. Kwon was thought to be in Singapore, but the city-state said on September 17 that he was no longer there. Prosecutors said on Sept. 26 that Interpol had issued a red alert — a request for police around the world to track down and arrest Kwon, who has also lost his South Korean passport. In February of this year, the US Securities and Exchange Commission charged Kwon and Terraform Labs with fraud. Singapore police subsequently said they had launched an investigation into the company. Kwon and former Terraform finance director Han Chang-joon were caught in March at the airport in Podgorica, Montenegro’s capital, trying to board a private jet to fly to Dubai. On the same day, the US accused Kwon of orchestrating a years-long crypto fraud. In a Montenegrin court on May 11, both men pleaded not guilty to using forged travel documents. On June 20, they were found guilty and each sentenced to four months in prison.

4. What is Kwon’s defense?

Kwon’s Terraform Labs rejected the South Korean allegations, saying the case against him had become “highly politicized”. The company spokesman said prosecutors acted unfairly and there was no reasonable basis to charge Kwon with violating the country’s Capital Markets Act because Luna does not qualify as a security under that heading. Whether Luna falls under securities laws is a key point in the case and reflects a broader question being asked by officials worldwide about the status of digital tokens. The company denied that Kwon was on the run and said he was in contact through lawyers with the agencies who had asked him to speak. Kwon representatives have previously said the SEC lawsuit accusing him and Terraform Labs of securities fraud is baseless. Kwon and company have yet to respond to the Singapore police investigation.

5. What are the wider implications for crypto?

The Terra outage is likely a precursor to stablecoin regulation to try and better protect buyers. Investors are also more wary of decentralized finance, or DeFi, which refers to the practice of trading, borrowing and lending tokens on digital ledgers like Kwon’s. Legislation has been drafted in the US that would ban algorithmic stablecoins like TerraUSD for two years. In South Korea, the country’s passion for digital assets has cooled. More generally, Terra’s losses have increased pressure on crypto investors to better assess risk. Billionaire Mike Novogratz, whose Galaxy Digital company had backed Terraform Labs, called TerraUSD a “great idea that failed” and a learning opportunity on crypto risk management.

–With assistance from Joanna Ossinger and Misha Savic.

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