South Korean Do Kwon led one of the biggest busts ever seen in the volatile cryptocurrency sector. His Terraform Labs Pte created the TerraUSD stablecoin, which was intended to have a constant $1 value via a complex mix of algorithms and trader incentives involving a sister token, Luna. Their combined value rose to over $60 billion until trust in the ecosystem disappeared in May 2022, causing investors to flee and leaving the tokens almost worthless. Kwon’s whereabouts became unclear four months later after South Korea issued an arrest warrant on charges including violating the Capital Markets Act. He denied any wrongdoing and tweeted that he is not “on the run”. But he is also the subject of a red notice from Interpol.
How the Crypto Titan of Terra Became a Fugitive
Kwon, 31, left Stanford University in 2015 with a computer science degree, according to his LinkedIn profile. He had stints at Apple Inc. and Microsoft Corp. before, as he puts it, “falling down the crypto rabbit hole.” Kwon co-founded Terraform Labs in 2018, one of many young coders who saw blockchain technology as a gateway to financial revolution. His project to create a stable digital currency outside mainstream finance and regulators wooed a legion of supporters, but also critics who said it was a doomed Ponzi scheme. Brash and combative at times, Kwon trolled naysayers online, telling one critic that the Luna community wasn’t as “poor as your tarnished ass.” In May 2022, when his project imploded, he said he was “devastated at the pain my invention has caused you all”. He has poked fun at people who see him as an outlier, saying he hasn’t run in a while and needs to “cut some calories”.
2. What happened to TerraUSD stablecoin?
TerraUSD, an algorithmically stable coin, and its sister token Luna collapsed in May 2022 after increasing in value during a pandemic crypto boom. TerraUSD was not backed by dollars or other assets, but instead was supposed to be worth $1 because it could be redeemed for $1 worth of Luna, which in turn was supposed to increase in value as the Terraform Labs network became more valuable. TerraUSD grew in popularity when Kwon started Anchor Protocol, which offered an eye-watering 20% interest rate on TerraUSD deposits. But the whole edifice crumbled when investor confidence disappeared during a sell-off of virtual coins. On May 7, 2022, TerraUSD’s stick began to bend as the price fell to 99 US cents. Terraform Labs dramatically increased the supply of Luna to restore the link, causing the latter’s price to drop. (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.
3. How did Kwon end up as a refugee?
TerraUSD’s implosion rocked digital tokens globally, exacerbating a wipeout of $2 trillion in crypto market value from a peak in November 2021. It drew scrutiny from 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 had engaged in fraud and illegal fundraising. On September 14, 2022, prosecutors said an arrest warrant had been issued for Kwon and five others on charges including violating the Capital Markets Act. Kwon was believed to be in Singapore, but the city-state on September 17 said he was no longer there. Prosecutors said on September 26 that Interpol had issued a red notice – a request to police worldwide to locate and arrest Kwon, who has also been stripped of his South Korean passport. In February of this year, the US Securities and Exchange Commission accused Kwon and Terraform Labs of fraud. Police in Singapore later said they had launched an investigation into the company.
4. What is Kwon’s defense?
Kwon’s Terraform Labs rejected the South Korean accusations, saying the case against him had been “heavily politicized.” The company’s spokesperson said in a statement that prosecutors acted unfairly and that there were no reasonable grounds to charge Kwon with violating the nation’s capital markets law because Luna does not qualify as a security under that rubric. Whether Luna is subject to securities laws is a key question in the case and reflects a broader question officials globally are asking about the status of digital tokens. The firm denied that Kwon was on the run and said he was in contact through lawyers with the agencies that had requested to speak to him. Kwon and Terraform Labs have yet to comment on the SEC filing. The company did not respond to a request for comment on the Singapore police investigation.
5. What are the broader implications for crypto?
The Terra fallout likely heralds regulations for stablecoins to try to 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 the one Kwon built. In the US, legislation has been drafted that will ban algorithmic stablecoins such as TerraUSD for two years. In South Korea, the country’s enthusiasm for digital assets has cooled. More broadly, the losses from Terra have put pressure on crypto investors to better assess risk. Billionaire Mike Novogratz, whose Galaxy Digital business had backed Terraform Labs, called TerraUSD a “big idea that failed” and a teaching moment about managing crypto risk.
–With assistance from Joanna Ossinger.
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