A South Korean court on Wednesday issued a warrant for the arrest of Do Kwon, founder of the blockchain platform Terraform Labs and creator of two cryptocurrencies called Luna and TerraUSD.
Investors accuse Kwon of fraud for peddling what turned out to be two of the greatest disasters in the young history of crypto.
TerraUSD was the real heartbreaker, a “stablecoin” regarded as 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 implies, it was linked to the U.S. dollar.
Luna served as a sort of buffer for TerraUSD — the system automatically converted TerraUSD coins to Luna coins if TerraUSD’s value dropped too low, or the other way around if Luna’s value dropped too far below the U.S. 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 that alluded to the supposedly invulnerable stability of his creation.
Kwon spent a great deal of time touting his system, extolling the virtues of cryptocurrency in general, retweeting his admirers, and refuting his critics. His followers liked to call themselves “LUNAtics,” after the name of his other cryptocurrency.
Kwon’s self-correcting system did not anticipate what would happen if buyers ran away from cryptocurrency entirely, dumping huge quantities of both TerraUSD and Luna at the same time. When that began happening in May, the algorithmic hocus-pocus that supposedly linked the Terra system to the value of the U.S. dollar stopped working.
The previously rock-solid Terra system — the crypto where a buck was always worth a buck — collapsed into a cloud of dust, unleashing a financial contagion that brought down banks, vaporized hedge funds, obliterated the life savings of countless investors, and trashed a few other cryptocurrencies for good measure.
Do Kwon’s previously exuberant social media accounts became very quiet. Suicide hotlines were set up for dejected speculators.
The global fallout from Terra’s implosion was estimated at over $42 billion. Kwon attempted to contain the damage by launching a revised “Luna 2.0” cryptocurrency, but the ploy did not work, as some market-watchers suspected Kwon was surreptitiously manipulating Luna 2.0 to make it appear more valuable than it actually was.
Angry investors asked if Terra was a swindle all along — a “Ponzi strategy,” as Lou Kerner of the Blockchain Coinvestors venture capital firm said 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 was not really pegged to anything at all. As long as investors kept buying the digital coins, they appeared to be valuable, and everyone holding them believed they were rich. Once the infusions of money from outside the system stopped, it collapsed.
Several cryptocurrency developers have been investigated around the world since the crypto selloff began in May. On Wednesday, it was Do Kwon’s turn as prosecutors issued warrants for him and five others on charges of violating South Korea’s capital markets law. The cofounder of Terraform Labs, Daniel Shin, was the subject of a police raid in July.
All six of the individuals named in Wednesday’s arrest warrants are currently living in Singapore where Terraform Labs was incorporated. Kwon has been living there since last December, a move he claims he made to protect his family rather than running away from the law. Interviews conducted from his Singapore residence found him unconcerned with prosecution but chafing under a new nickname: “the Elizabeth Holmes of crypto,” a reference to the once-revered but now-reviled founder of scandal-plagued U.S. biotech company Theranos.
“Life is long,” Kwon said when asked about the possibility of serving jail time in August.
The Luna cryptocurrency dropped another 35 percent in value when news of the warrant for Kwon’s arrest broke on Wednesday.
Another cryptocurrency surged 200 percent in value on the same day: a novelty token called “Jail Kwon” developed by angry Terra investors to “make light of the terrible situation that many holders found themselves in.”