Do Kwon Arrested in Montenegro
A year in the making
Terraform Labs co-founder and CEO Do Hyeong Kwon’s arrest has made headlines and has been a major development in the ongoing criminal investigation into the collapse of the Terra ecosystem. The arrest also highlights the risks associated with algorithmic stablecoins and other crypto asset securities and underscores the need for greater regulatory oversight to protect investors. It is essential for the crypto industry to strengthen its regulatory frameworks and build trust among investors to ensure the long-term sustainability of the sector.
Kwon’s arrest comes almost a year after the collapse of the Terra ecosystem last May, an event that thrust the digital assets industry firmly into crypto winter and contributed to the failure of several firms like the crypto hedge fund Three Arrows Capital (3AC). It involved the implosion of LUNA and the algorithmic stablecoin TUSD, which quickly wiped away $40 billion in digital asset markets as the coins plummeted in value. The event sent the price of Bitcoin tumbling from $40,000 to around $27,000 two weeks later.
A long time coming
South Korean authorities issued an arrest warrant for Kwon last September, months after his home was raided as part of a criminal probe into the collapse of the Terra ecosystem. The International Criminal Police Organization (Interpol) later approved South Korea’s request to issue a red notice for Kwon, making him a wanted criminal worldwide.
The arrest of Kwon, who was reportedly caught in possession of falsified documents, was confirmed by the country’s Minister of Interior, Filip Adzic. Local reports in South Korea also indicate that “a person presumed to be the CEO of Terraform Labs” had been arrested in Montenegro. The country’s national police agency reportedly said that it had “confirmed” that the person arrested was “the same person as CEO Kwon with photo data.”
Lots of charges
Kwon was charged last month with violating securities law by the Securities and Exchange Commission (SEC). The SEC accused him of “orchestrating a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.” The complaint was filed in the US District Court for the Southern District of New York, where FTX founder and former CEO Sam Bankman-Fried’s criminal case brought by the US Justice Department currently plays out.
In addition to claims centered on LUNA and Terra USD, the SEC’s complaint took issue with tokens marketed by Kwon that represented publicly traded stocks on Terraform Labs’ Mirror Protocol. “We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD,” said SEC Chair Gary Gensler. “We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
This is fairly public knowledge at this point, but the large currency contraction that UST went through in Feb 2021 was started by Alameda, when they sold 500mm UST in minutes to drain its curve pools during the MIM crisis— Do Kwon 🌕 (@stablekwon) December 8, 2022
Risks with crypto
Kwon’s arrest has once again put the spotlight on the risks associated with algorithmic stablecoins and other crypto asset securities. These digital assets have gained popularity in recent years due to their promise of stability and predictability, but they have also been the subject of regulatory scrutiny and investor skepticism.
Algorithmic stablecoins are digital assets whose value is pegged to a stable asset like the US dollar. Unlike traditional stablecoins that are backed by a reserve of fiat currency, algorithmic stablecoins rely on complex algorithms and smart contracts to maintain their value. This makes them vulnerable to market fluctuations and external factors that can cause their value to fluctuate.
the arrest of Do Hyeong Kwon is a significant development in the ongoing criminal investigation into the collapse of the Terra ecosystem. It highlights the risks associated with algorithmic stablecoins and other crypto asset securities and underscores the need for greater regulatory oversight to protect investors. The crypto industry needs to work with regulators to develop clear and effective regulatory frameworks that balance innovation and investor protection. Only then can the industry reach its full potential as a transformative force in the global economy.