A South Korean court on Wednesday issued an arrest warrant for Do Kwon, founder of blockchain platform Terraform Labs and creator of two cryptocurrencies called Luna and TerraUSD.
Investors accuse Kwon of fraud for fueling what turned out to be two of the biggest disasters in crypto’s young history.
TerraUSD was the real heartbreaker, a “stablecoin” considered one of the world’s top ten cryptocurrencies before its precipitous collapse in May. Stablecoins are cryptocurrencies whose value is tied to the value of another asset. As TerraUSD’s name suggests, it was pegged to the US dollar.
Luna acted as a kind of buffer for the TerraUSD system automatically converted TerraUSD coins to Luna coins if TerraUSD’s value fell too low, or vice versa if Luna’s value fell too far below the US dollar. The idea was that reducing the number of TerraUSD coins in circulation by automatically converting them to Luna would bring TerraUSD’s value back up.
Do Kwon was, to put it mildly, an outspoken champion of his system. The Stanford-educated 31-year-old crypto designer was a constant presence on social media, with a Twitter handle of @stablekwon alluding to the supposedly invulnerable stability of his creation.
Kwon spent a lot of time touting his system, extolling the virtues of cryptocurrency in general, retweeting his admirers and rebutting his critics. His followers liked to call themselves “LUNAtics”, after the name of his other cryptocurrency.
Decentralized finance and decentralized money protest state-sponsored violence vs financial sovereignty
Volatility is a price believers pay to achieve that sovereignty
Liquidations should not invalidate these beliefs
— Do Kwon 🌕 (@stablekwon) 18 June 2022
Kwon’s self-correcting system didn’t anticipate what would happen if buyers ran away from cryptocurrency altogether, dumping huge amounts of both TerraUSD and Luna at the same time. When it started happens in May, the algorithmic hocus pocus that allegedly linked the Terra system to the value of the US dollar stopped working.
The previously rock-solid Terra system—the crypto where a buck was always worth a penny—collapsed into a cloud of dust, triggering a financial contagion that brought down banks, vaporized hedge funds, wiped out the life savings of countless investors, and trashed a few other cryptocurrencies for good measure.
Do Kwon’s previously bubbly social media accounts went very quiet. Suicide calls were set up for informed speculators.
The global fallout from Terra’s implosion was estimated of over 42 billion dollars. Kwon attempted to limit the damage by launching a revised “Luna 2.0” cryptocurrency, but the ploy did not work, as some market watchers suspected that Kwon was covertly manipulating Luna 2.0 to make it appear more valuable than it actually was.
Angry investors questioned whether Terra was a scam all along — a “Ponzi strategy,” as Lou Kerner of venture capital firm Blockchain Coinvestors so in May.
Kerner’s point was that the system only worked as long as investors kept pumping non-crypto money into it. Terra’s value wasn’t really tied to anything at all. As long as investors kept buying the digital coins, they appeared to be valuable and everyone who held them thought they were rich. When money flows outside the system stopped, it collapsed.
Several cryptocurrency developers have come under scrutiny around the world since the crypto sale started in May. On Wednesday, it was Do Kwon’s turn as prosecutor issued warrants for him and five others accused of violating South Korea’s capital markets law. The co-founder of Terraform Labs, Daniel Shin, was the subject of a police raid in July.
All six people named in Wednesday’s arrest warrant currently live in Singapore, where Terraform Labs was incorporated. Kwon has lived there since last December, a move he claims he did to protect his family instead of running from the law. Interviews carried out from his residence in Singapore, he found himself unconcerned about prosecution, but chafed under a new nickname: “The Elizabeth Holmes of crypto,” a reference to once revered, but now-reviled founder of the scandal-plagued American biotechnology company Theranos.
“Life is long,” Kwon said when asked about the possibility of serving prison time in August.
The Luna cryptocurrency fell another 35 percent in value when the news of the arrest warrant for Kwon became known on Wednesday.
Another cryptocurrency rose 200 percent in value on the same day: a news token called “Jail Kwon” developed by angry Terra investors to “make light of the terrible situation that many holders found themselves in.”