South Korean Authorities Pursue Arrest of Terraform Labs CEO Do Kwon
South Korean law enforcement is actively seeking the arrest of Do Kwon, the co-founder and CEO of Terraform Labs, the company responsible for the now-defunct terraUSD and luna cryptocurrencies. Prosecutors in South Korea are also looking to freeze bitcoin assets associated with Kwon.
The Rise and Fall of Do Kwon
In the months preceding the exposure of the FTX scandal involving Sam Bankman-Fried, and well before Binance’s founder, Changpeng Zhao, faced legal repercussions and settled with U.S. authorities for billions, Do Kwon had already become a notorious figure in the cryptocurrency world. His failed stablecoin, which was pegged to the U.S. dollar, nearly dismantled the entire crypto sector. In May 2022, Kwon was at the peak of his success, with Terraform Labs behind one of the leading U.S.-pegged stablecoins. His ventures were attracting significant investments, and the combined market value of his tokens, terra and luna, soared into the tens of billions. Kwon even made the Forbes 30 under 30 list during this period. In a show of faith in his creation, just a month before the collapse, Kwon named his newborn daughter Luna, stating it was “my dearest creation named after my greatest invention.”
The Algorithmic Stablecoin Collapse
Unlike traditional stablecoins, which are backed by a mix of cash and other assets to maintain their value, Kwon’s stablecoin relied on a complicated algorithm. When this algorithm failed in May 2022, it caused an overnight loss of $40 billion in market value, devastating numerous investors and triggering the collapse of hedge fund Three Arrows Capital in June 2022. This was followed by the downfall of crypto lenders Voyager Digital, BlockFi, and Genesis, ultimately tying back to FTX’s collapse. The failure of Kwon’s stablecoin shattered investor confidence and accelerated a downturn in cryptocurrencies, which was already part of a broader trend away from riskier assets.
Legal Consequences for Kwon and Terraform Labs
Since that catastrophic event, U.S. courts have been addressing the aftermath by prosecuting individuals and penalizing defunct companies. Recently, a judge approved a settlement between Kwon and bankrupt Terraform Labs with the U.S. Securities and Exchange Commission (SEC) for $4.5 billion. This settlement follows a jury’s finding that Kwon and his company were liable for securities fraud after less than two hours of deliberation. It remains uncertain how Kwon, who is currently in the Balkans, and Terraform Labs, which reportedly has around $150 million in assets, will cover this fine. Nevertheless, this case serves as a clear indication that crypto’s wrongdoers are facing consequences for their actions.
Consequences for Other Crypto Figures
In April, Binance’s founder and former CEO was sentenced to four months in prison after settling with U.S. authorities for $4.3 billion. Similarly, FTX’s founder received a 25-year prison sentence in March. Celsius CEO Alex Mashinsky is set to face a jury trial later this year. The fallout from these incidents marks the end of an era for many prominent figures in the cryptocurrency world, coinciding with the maturation of the digital asset market and the increasing involvement of major Wall Street firms.
Current Status of Do Kwon
Kwon is currently navigating a complex legal situation in Montenegro, having been on the run for several months after leaving Singapore. He was apprehended in March of last year while attempting to flee to Dubai using a false passport. Kwon is out on bail but remains in Montenegro pending a Supreme Court decision regarding his potential extradition to South Korea or the United States. The outcome of his criminal charges depends on the Montenegrin authorities, and there are expectations of significant penalties awaiting him, with South Korean prosecutors suggesting he could face the longest prison sentence in the nation’s history for financial crimes, potentially exceeding 40 years.
The Downfall of TerraUSD and Luna
The collapse of terraUSD (UST) and its companion token luna in May 2022 sent shockwaves through the crypto market. UST was designed to be a stablecoin pegged to the U.S. dollar, intended to facilitate transactions in place of traditional fiat currencies. Meanwhile, luna was meant to maintain UST’s peg while providing substantial returns to investors. The project experienced astronomical growth, with luna appreciating by 15,800% in 2021. However, the algorithmic structure of the stablecoin, which relied on code instead of tangible assets, proved to be unsustainable. The subsequent failure wiped out nearly half a trillion dollars from the crypto market and severely damaged investor confidence.
Statements from Regulatory Authorities
According to SEC Chair Gary Gensler, the case underscores the importance of economic realities over marketing tactics in determining whether a product qualifies as a security under U.S. law. Gensler emphasized that Terraform and Kwon’s fraudulent actions have caused profound losses for investors, some of whom lost their entire life savings. The settlement is seen as a step towards justice for the victims of their misconduct.
Sam Bankman-Fried’s Sentencing
FTX founder Sam Bankman-Fried was sentenced to 25 years in prison in March due to the extensive fraud and conspiracy that led to the downfall of his cryptocurrency exchange and hedge fund, Alameda Research. The Manhattan federal court’s sentence was less than the 40 to 50 years requested by federal prosecutors but considerably more than the five to six years proposed by his defense team. Judge Lewis Kaplan expressed concern over the risk Bankman-Fried posed for future wrongdoing, citing a lack of remorse during the trial. The jury found him guilty of multiple criminal counts, holding him accountable for the loss of around $10 billion in customer funds as a result of his fraudulent activities. Bankman-Fried intends to appeal his conviction.
Sentencings of Other FTX Executives
Ryan Salame, a former executive at FTX, received a sentence of 90 months in prison, with three years of supervised release to follow. Other former FTX executives, including Caroline Ellison, Nishad Singh, and Gary Wang, are awaiting sentencing after pleading guilty to related charges. In a positive development for FTX users, the bankruptcy estate announced that nearly all customers would receive their funds back, with some getting more than their initial claims.
Changpeng Zhao’s Legal Troubles
Changpeng Zhao, the founder of Binance, has begun serving a four-month sentence in a low-security federal prison after pleading guilty to charges of facilitating money laundering through his exchange. His sentence was less than the three years sought by prosecutors and was also considerably shorter than the 12 to 18 months recommended by sentencing guidelines. Zhao publicly acknowledged his failures in implementing an effective anti-money laundering program during his court appearance and expressed regret for his actions. Following the resolution of a lengthy investigation into Binance, Zhao resigned as CEO but reportedly retains a significant ownership stake in the company.
The Ripple Effect of Crypto Failures
The collapse of Terraform Labs and its stablecoin project triggered a chain reaction that devastated other entities in the cryptocurrency space, including Three Arrows Capital and various lending platforms such as Voyager Digital and Celsius. The failures of these firms were interconnected; when Three Arrows Capital was unable to meet margin calls, it set off a domino effect that led to significant financial losses across the sector. Currently, these companies are in various stages of bankruptcy proceedings, with Celsius having recently emerged from bankruptcy. Meanwhile, Kyle Davies, co-founder of Three Arrows Capital, has managed to evade legal consequences so far, while his co-founder Su Zhu has served time in Singapore.
