Do Kwon
Kwon Do-Hyung (Korean: 권도형), more commonly known as Do Kwon, is the South Korean co-founder and CEO of Singapore-based Terraform Labs, the parent company of crashed stablecoin TerraUSD (now called LUNC) and cryptocurrency LUNA. In May 2022, TerraUSD and Luna experienced a significant decline, resulting in a loss of nearly $45 billion in market capitalization over the course of a week and causing hundreds of billions in losses in the larger crypto market. [7][6]
Do Kwon was taken into custody on March 23, 2023, in Montenegro for allegedly using falsified documents while attempting to travel to Dubai. Following his arrest, a U.S. federal grand jury charged him with eight counts, including securities fraud, commodities fraud, wire fraud, and conspiracy. [8][20]
Early Life & Education
Do Kwon was born on September 6, 1991[9], in Seoul, South Korea. He attended Daewon Foreign Language High School in Seoul. After receiving his B.Sc. in Computer Science from Stanford University in 2015, he transitioned to work briefly as a Software Engineer for Microsoft and Apple.[2][10]
Career
In January 2016, Do Kwon was the founder and former Chief Executive Officer of Anyfi, a wireless mesh network startup building decentralized applications for real-world use. During his time at Anyfi, Do co-invented several of the company's key patents around decentralized networks and routing systems.[2]
Terra Labs
In January 2018, Do Kwon co-founded Terra alongside entrepreneur Daniel Shin. [1] In late 2018, Terra Labs released a cryptocurrency called Luna. Terraform began selling its stablecoin TerraUSD (UST), in 2020. [6]
The Terra blockchain, comprising UST and Luna, employed stable mining incentives that aimed to establish a flexible monetary policy and an efficient fiscal policy to mitigate the risks associated with limited usage and adoption. The UST coin was an algorithmic stablecoin with its value backed by Luna to maintain a value of around $1, unlike other coins pegged to cash. [24]
During his time at Terra Labs, Kwon also worked on various blockchain projects, including Mirror, Prism, Astroport, and Anchor. The Mirror token, known as MIR, runs on a decentralized finance platform related to Terra. MIR allows people to disregard restrictions on stocks and other assets by making it easier to create and trade synthetic versions. [10][11][12]
Luna Crypto Crash
Initially, Terra created TerraUSD (UST) and LUNA as sister coins on the blockchain. The UST coin was an algorithmic stablecoin with its value backed by Luna to maintain a value of around $1, unlike other coins pegged to cash. [23]
On May 7th, 2022, the price of TerraUSD (UST), the algorithmic stablecoin of the Terra network, dropped to $0.91 after $2 billion of UST was unstaked and liquidated, causing a decrease in its value from $1. This resulted in traders exchanging 90 cents worth of UST for $1 of Luna. The reason for the sudden unstaking of the $2 billion worth of UST is unknown. After a large amount of UST was dumped, the stablecoin started to depeg. [24]
Investors also sold their UST once the stablecoin couldn't retain its peg. The price bounced between 30 cents and 50 cents in the week following the initial depeg, which then eventually fell to a steady low of under 20 cents. Its market cap, which was around $18 billion in early May, fell to $770 million by the end of May. [25]
This event led to an increase in the circulating supply of Luna from 345 million Luna to 3.47 billion Luna on May 12, 2022, which caused its eventual delisting from crypto exchanges, making it worthless. [23]
Luna Crypto Crash: The Aftermath
Following the crash, several crypto exchanges such as Binance delisted Luna and UST pairings. Trading suspensions were also prevalent in the lead-up to the weekend. A Luna Coinbase listing, previously set for launch by the end of June, was also quietly pulled. [24]
Do Kwon published a recovery plan for Luna, which had a temporary effect on the overall sentiment. Luna briefly rose to $4.46, before dropping below the $1 mark once again. It has since plummeted below 1 cent. Luna was abandoned after the drop, with Terra launching a new chain and new coin - Luna 2.0[8]. The old Luna was rebranded as Terra Classic now known as LUNC. [26]
Luna 2.0
On 28 May 2022, following the Luna crypto crash, Terra 2.0, a new form of the blockchain and the LUNA cryptocurrency, was launched. The new form of LUNA, which sees its original version rebranded as terra classic (LUNC), was airdropped to holders. Terra 2.0 continues to operate as a fork Terra Classic (LUNC). The platform continues to roll out new services focused on cross-chain integrations. [13]
Regulatory Issues
In June 2022, following the LUNA crash, the U.S. Securities and Exchange Commission (SEC) started an investigation on Terra Labs to investigate whether the marketing of TerraUSD (UST) stablecoin violated federal securities and investment regulations. Despite Terra Labs being based in Singapore, TerraUSD falls under SEC's regulations as Americans bought the token to fund businesses or seek profit. [14]
On May 17, 2022, members of the Korean parliament and government authorities called for a potential parliamentary hearing regarding Terraform Labs and its founder Kwon, citing the lack of regulatory framework as the main reason for the impeded investigation on the events that took place.[16]
On May 18, 2022, following investigations led by the National Tax Service of Korea, Terraform Labs founders Kwon and Daniel Shin were asked to pay additional taxes worth approximately $100 million in December 2021. However, the two founders refused to pay on the grounds that the subsidiaries Terraform Labs Pte. Ltd. (Singapore) and Terraform Labs Virgin Islands are not Korean entities. Regardless, the National Tax Service has claimed that since "the founders had made practical management decisions" during their time as official residents in Korea, the transfer of funds between the subsidiaries and the profits made by each entity need to obey Korean jurisdiction. [17][18]
In 2021, before the SEC investigation regarding TerraUSD, the U.S. SEC issued a subpoena to Terraform Labs and Kwon, specifically regarding the "Mirror Protocol." Kwon responded by stating that he wouldn't comply with the demands and instead would be suing the SEC. Later, Kwon filed to dissolve the company's Korean entity on April 30, 2022, which was approved on May 4, 2022. The SEC later began an investigation of Terra Labs in June 2022. [21][11][22]
In February 2023, the SEC sued Do Kwon and Terraform Labs for fraud. The SEC alleges that Kwon marketed those assets, “repeatedly claiming” the tokens would increase in value. [14][15][19]
“Today’s action not only holds the defendants accountable for their roles in Terra’s collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets, but once again highlights that we look to the economic realities of an offering, not the labels put on it,” - SEC enforcement director Gurbir Grewal said in a statement.
On March 23, 2023, Do Kwon was arrested within the territory of the Balkan nation, Montenegro for allegedly using falsified documents while attempting to travel to Dubai. He was also found to be carrying falsified Belgian travel documents [20]
“Montenegrin police have detained a person suspected of being one of the most wanted fugitives, South Korean citizen Do Kwon, co-founder, and CEO of Singapore-based Terraform Labs.” - Filip Adzic, minister of the interior of Montenegro. [28]
Following his arrest, he was charged by a federal grand jury in Manhattan with eight counts, including commodities fraud, securities fraud, wire fraud, and conspiracy to defraud and engage in market manipulation. [27]
Under the charge, conspiracy to defraud, the U.S. prosecutors claim to have jurisdiction over Kwon because he made a series of false and misleading statements during a TV interview that was transmitted to — among other places — the Southern District of New York, about the extent to which the Terra blockchain had been adopted by users. [27]
The remaining four charges are related to a series of purportedly misleading statements about the effectiveness of the TerraClassicUSD stablecoin (USTC) to keep its peg with the U.S. dollar, as well as Kwon’s alleged involvement in trading strategies that were designed to alter the market price of USTC. [27]
One month later in April 2023, KBS News reported that Kwon had sent 9 billion won, equaling USD $7 million, to law firm Kim & Chang prior to the collapse of TerraUSD. [29]
On May 11, 2023, Kwon pled not guilty to a charge of using a forged Costa Rican passport to travel through the Montenegro airport where he was arrested.[30] He has been released under house arrest after being granted bail of 400,000 euros ($436,000).[23] Later, Montenegro prosecutors appealed against the decision of the court to grant Do Kwon and Han Chang-Joon a release from detention on bail.[31][32]
Settlement with SEC
On May 30, 2024, Terraform Labs and its founder Do Kwon reached a tentative settlement with the U.S. Securities and Exchange Commission (SEC) which sued them for allegedly misleading cryptocurrency investors before the 2022 collapse of the stablecoin TerraUSD. The deal but not its terms was disclosed on a court website on May 30. U.S. District Judge Jed Rakoff in Manhattan asked the SEC and the defendants to file papers supporting the settlement by June 12, 2024. [33]
In March 2024, Do Kwon was released from prison in Montenegro after serving a fourth-month sentence for carrying a false passport. According to a Bloomberg report, he was released on Saturday, March 23, 2024. The Supreme Court halted the extradition of the Terraform Labs co-founder to South Korea, suspending a lower court’s ruling. [34]
“We released Do Kwon from prison as his regular prison term for traveling with fake papers ended. Since he is a foreign citizen and his documents were withheld, he was taken for an interview to the police directorate for foreigners, and they will deal with him further.”[34]
In April 2024, Kwon and Terraform Labs were found guilty by a jury of civil fraud charges and declared liable for defrauding investors about the coins. The SEC accused the company and Kwon of misleading investors in 2021 about the stability of TerraUSD, a stablecoin designed to maintain a value of $1. The regulator also accused them of falsely claiming Terraform's blockchain was used in a popular Korean mobile payment app. [35]
On June 12, 2024, Terraform Labs and Do Kwon agreed to a settlement with the U.S. SEC, requiring them to pay a combined $4.5 billion in disgorgement and civil penalties. The settlement also includes a permanent ban on Kwon and Terraform Labs from buying and selling crypto asset securities, including all tokens in the Terra ecosystem. [36]
In addition to their proposed final judgment, lawyers for the SEC filed a letter with the court urging the New York judge overseeing the case, U.S. District Court Judge Jed Rakoff of the Southern District of New York (SDNY), to approve the settlement agreement.
“If approved, the proposed judgment will send an unmistakable deterrent message to not only those who engage in brazen misconduct, but also to all those who seek to evade the requirements of the federal securities laws by crafting new standards of behavior for crypto assets that fall under the purview of the federal securities laws,” the lawyers wrote.[36]
