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 the financial revolution. His project to create a stable digital currency outside of major finance and regulators attracted a legion of supporters, but also critics who said it was a doomed Ponzi scheme. Sometimes cheeky and combative, Kwon trolled detractors online, telling one reviewer that the Luna community wasn't as "poor as your busted ass." When his project imploded, he said he was "heartbroken by the pain my invention has caused all of you."
2. What happened to the TerraUSD stablecoin?
TerraUSD, an algorithmic stablecoin, and its sister token Luna rose in value during the pandemic-era cryptocurrency boom. TerraUSD was not backed by dollars or other assets, but was instead supposed to be worth $1 because it could be redeemed for $1 of Luna, which itself 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 astonishing 20% โโinterest rate on TerraUSD deposits. But the whole building came crashing down as investor confidence disappeared amid a virtual currency sell-off. On May 7, 2022, TerraUSD's parity began to ease when its price fell to 99 cents. Terraform Labs dramatically increased the supply of Luna to restore the link, causing the price of the latter to plunge. (It was once worth over $100.) A few billion dollars worth of Bitcoin reserves failed to stop the spiral: within days, TerraUSD and Luna were virtually worthless. Korean authorities are trying to determine the whereabouts of millions of dollars in assets.
3. How did Kwon end up as a fugitive?
The TerraUSD implosion rocked digital tokens globally, exacerbating a $2 trillion loss in crypto market value from a November 2021 peak. That brought scrutiny from US regulators to Asia as well and law enforcement in South Korea, where some 280,000 people had bought Luna. Lawyers for Luna's 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 other people on charges that included violations of capital markets law. Kwon was thought to be in Singapore, but on September 17 the city state said he was no longer there. On September 26, prosecutors said Interpol had issued a red notice: a request for police around the world to locate and arrest Kwon, who also had his South Korean passport taken away. In February of this year, the US Securities and Exchange Commission charged Kwon and Terraform Labs with fraud. Singapore police later said they had launched an investigation in relation to the company. Kwon and former Terraform CFO Han Chang-joon were caught at the airport in Podgorica, the capital of Montenegro, in March while trying to board a private plane to fly to Dubai. On the same day, the US accused Kwon of orchestrating a year-long crypto fraud. In a Montenegrin court on May 11, both men pleaded not guilty to the charge of using forged travel documents. On June 20, they were found guilty and sentenced to four months in prison each.
4. What is Kwon's defense?
Kwon's Terraform Labs rejected the South Korean charges, saying the case against it had become "highly politicized." The company spokesman said prosecutors were acting unfairly and there was no reasonable basis to charge Kwon with violating the nation's Capital Markets Law because Luna does not qualify as a security under that heading. Whether Luna is subject to securities law is a key issue in the case and echoes a broader question that officials around the world are asking about the status of digital tokens. The firm denied that Kwon was on the run and said it was in contact through lawyers with the agencies that had asked to speak with him. Kwon's representatives previously said the SEC's lawsuit accusing him and Terraform Labs of securities fraud is unfounded. Kwon and the company have yet to comment on the Singapore police investigation.
5. What are the broader implications for cryptocurrencies?
The fallout from Terra 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 would ban algorithmic stablecoins like TerraUSD for two years. In South Korea, the nation's fervor for digital assets has cooled. More broadly, Terra's losses have increased pressure on crypto investors to better assess risk. Billionaire Mike Novogratz, whose Galaxy Digital business had backed Terraform Labs, called TerraUSD a โgreat idea that failedโ and a teachable moment on crypto risk management.
--With assistance from Joanna Ossinger and Misha Savic.
More stories like this are available at bloomberg.com
