(Bloomberg) -- South Korean Do Kwon presided over one of the biggest busts ever in the volatile crypto sector. His Terraform Labs Pte created the TerraUSD stablecoin, which was meant to have a constant $1 value via a complex mix of algorithms and trader incentives involving a sister token, Luna. Their combined value soared past $60 billion until confidence in the system evaporated in May 2022, prompting investors to flee and denuding the tokens of value. With Kwon’s whereabouts unclear, South Korea issued an arrest warrant on allegations including breaches of capital-markets law. He denied any wrongdoing or being “on the run.” But he became the subject of an Interpol red notice and was arrested in Montenegro in March 2023, sparking dueling extradition requests from South Korea and the US. A court in Montenegro ruled over a year later that Kwon should be sent to South Korea.
1. Who is Do Kwon?
Kwon, 32, left Stanford University in 2015 with a computer science degree, his LinkedIn profile shows. 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 digital ledgers as a gateway to financial revolution. His project of creating a stable digital currency outside of mainstream finance and regulators wooed a legion of followers but also critics who said it was a doomed Ponzi scheme. At times brash and combative, Kwon trolled naysayers online, telling one critic that the Luna community was not as “poor as your broke ass.” As his project imploded, he said he was “heartbroken about the pain my invention has brought on all of you.”
2. What happened to the TerraUSD stablecoin?
TerraUSD, an algorithmic stablecoin, and its sister token Luna swelled in value during a pandemic-era crypto boom. TerraUSD wasn’t backed by dollars or traditional assets but instead was supposed to be worth $1 because it could be redeemed for $1 worth of Luna, which in turn was meant to increase in value as the Terraform Labs network became more valuable. 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 crumbled when investor confidence disappeared amid a selloff in virtual coins. On May 7, 2022, TerraUSD’s peg began buckling when its price dropped to 99 US cents. Terraform Labs dramatically raised the supply of Luna to restore the link, causing the latter’s price to sink. (It was once worth more than $100.) A Bitcoin reserve worth a few billion dollars failed to stem the spiral: in a matter of days, TerraUSD and Luna were practically valueless. Korean authorities are trying to determine the whereabouts of millions of dollars worth of assets.
3. How did Kwon end up a fugitive?
TerraUSD’s implosion shook digital tokens globally, exacerbating a $2 trillion wipeout in crypto market value from a November 2021 peak. That drew the scrutiny 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 Kwon had engaged in fraud and illegal fundraising. On Sept. 14, 2022, prosecutors said an arrest warrant had been issued for Kwon and five others on charges including breaches of capital-markets law. Kwon was thought to be in Singapore, but the city state on Sept. 17 said he was no longer there. Prosecutors on Sept. 26 said Interpol had issued a red notice — a request for police worldwide to locate and arrest Kwon, who has also been stripped of his South Korean passport. In February 2023, the US Securities and Exchange Commission accused Kwon and Terraform Labs of fraud. Kwon and Terraform’s former chief financial officer, Han Chang-joon, were caught at the airport in Montenegro’s capital Podgorica in March when they tried to board a private jet to fly to Dubai. The same day the US charged Kwon with orchestrating a years-long crypto fraud. Han was extradited to South Korea in February 2024 and Kwon is set to follow.
4. What is Kwon’s defense?
Kwon’s Terraform Labs rejected the South Korean charges, saying the case against him had become “highly politicized.” The company’s spokesperson said that prosecutors were acting unfairly and that there was no reasonable basis for accusing Kwon of breaching the nation’s Capital Markets Act because Luna doesn’t qualify as a security under that rubric. Whether Luna is subject to securities law is a key issue in the case and echoes a wider question officials globally are asking about the status of digital tokens. Kwon’s representatives previously said the SEC lawsuit was unfounded. In June 2024, the SEC said Terraform and Kwon agreed to pay about $4.5 billion after a jury found them liable for fraud.
5. What are the wider implications for crypto?
Billionaire Mike Novogratz, whose Galaxy Digital business had backed Terraform Labs, called TerraUSD a “big idea that failed” and a teaching moment about crypto risk management. The Terra fallout encouraged officials to create rules for stablecoins to try to better protect buyers. Jurisdictions such as the European Union, Japan, Singapore, Hong Kong and Dubai have stepped up efforts to regulate the sector as they jostle to become digital-asset hubs. The US Congress has been mulling a number of crypto bills, including legislation to establish guardrails for stablecoins. 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.
--With assistance from Misha Savic and Suvashree Ghosh.
©2024 Bloomberg L.P.