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From Billionaire to Montenegro Jail: The Rapid Rise and Fall of Terra Chief Do Kwon

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Before Terra-Luna

Do Kwon, 31, whose full name is Kwon Do-hyung, was born in South Korea and graduated from Daewon Foreign Language High School in the capital city Seoul.

Daewon is one of the country’s most prestigious private schools, with alumni such as Lee Boo-jin, the 52–year-old eldest daughter of former Samsung Group chairman Lee Kun-hee, who built the company into South Korea’s biggest conglomerate, or chaebol.

In 2015, Kwon completed his bachelor’s degree in computer science at California’s Stanford University, regarded as the most selective of all U.S. colleges with a 5% acceptance rate, the same as Harvard University. It also boasts the most winners of the Turing Award, known as the Nobel Prize of computer science. 

(In an irony of coincidence, Sam Bankman-Fried grew up on the Stanford campus, where his parents taught law. Like Kwon, Bankman-Fried built a multibillion dollar cryptocurrency empire that unraveled over a matter of days. Unlike Kwon in a Montenegro jail, Bankman-Fried is living back on campus in his parents’ house on bail, though he also faces allegations of fraud; charges he has denied.) 

Kwon reportedly spent three months in a software engineer internship at Apple Inc. in 2012 during his studies and then another three months at Microsoft Corp. in 2015 after graduating from Stanford.

It is not clear if Kwon was offered a job at the companies, but in January 2016 he founded a peer-to-peer telecommunications company known as Anyfi Inc., according to his LinkedIn profile. He was also working on a cryptocurrency white paper with college classmate Nicholas Platias, who later became head of research at Terraform Labs. 

At some point, Kwon formed a partnership with established South Korean entrepreneur Daniel Shin, 38, who would become a co-founder with Kwon of Terraform Labs.

Shin, whose full name is Shin Hyun-seung, started an e-commerce company in 2010 known as Tmon Inc. and built it into one of the biggest of its kind in the country with revenues of US$100 million by 2021. Like Kwon, Daniel Shin went to a top U.S. university, graduating with a bachelor’s degree in economics from the Wharton School of the University of Pennsylvania. 

Daniel Shin also comes from a well connected family. His grandfather Shin Jik-soo served as minister of justice and director of the Korean Central Intelligence Agency into the 1970s under then president Park Chung-hee. Park, an army general, ran South Korea under military rule from 1962 until he was assassinated in 1979.

Daniel Shin also has a prominent businessman uncle, Hong Seok-hyun, who is chairman of JoongAng Holdings, one of South Korea’s largest media groups spanning newspapers, broadcasting, publishing and entertainment. In an example of the ties that bind South Korea’s chaebol, the elder sister of Shin’s uncle is the widow of the late Samsung head Lee Kun-hee.

Terra-Luna

Terraform Labs was founded in 2018 in South Korea by Kwon and Shin and in April 2019, the company released the TerraUSD (UST) stablecoin and the sister Luna cryptocurrency. 

Unlike other stablecoins that are presented as backed 1-1 by the U.S. dollar or other “real-world” assets, TerraUSD was a so-called algorithmic stablecoin, or pegged to the U.S. dollar but backed by a coding algorithm that involved “burning and minting” the Luna cryptocurrency to keep parity with the U.S. currency. 

Terraform Labs moved headquarters to Singapore from South Korea in November 2020. 

The company also started to provide various decentralized finance (DeFi) services on the Terra blockchain, most notably the Anchor Protocol. This offered TerraUSD holders who staked, or deposited, the stablecoin on the blockchain an annual percentage yield of as much as 19.5%, attracting over 226,000 depositors by April 2022.

The Luna token was priced at around US$3 when it was introduced in May 2019 according to CoinGecko. It rose to a high of US$119.18 by April 2022, which along with the TerraUSD stablecoin gave a valuation to the growing Terraform Labs empire of upwards of US$40 billion, minting a tribe of millionaires who bought in early and elevating Do Kwon into an icon of the brave new world of crypto and how this time it was different. Except it wasn’t.

Earthquake

The death spiral of the Terra-Luna empire started on May 7, 2022, when more than US$2 billion of the TerraUSD stablecoin was pulled from Anchor Protocol, destabilizing the stablecoin and causing it to lose its peg to the U.S. dollar. 

This in turn sparked a run on the stablecoin as more holders sold the token, massively increasing the supply of its algorithmically collateralized token Luna.

Luna was trading at US$116 on May 4 and over the next 10 days fell to near zero, or became worthless. What prompted the initial massive withdrawals from Anchor remains unclear, though Terraform Labs has said it was the subject of deliberate “attacks” from adversaries it has not identified. 

Hundreds of thousands of investors around the world were caught in the implosion — crypto investors worldwide have claimed to have lost their life savings, police in some cases have reportedly linked cases of suicide to the collapse. South Korea estimates that the crash resulted in US$58 billion worth of damages to 280,000 people in the country. Nearly 230,000 Indian investors lost their investments in Luna, India’s tech media outlet Inc42 reported. 

Accounting for the fact Luna had the seventh largest market capitalization in the global crypto market and TerraUSD was the third most-used stablecoin at their peak, the number of victims and the amount lost in the collapse likely exceeds estimates.

Tsunami

But if the Terra-Luna stablecoin and cryptocurrency were at the center of this corporate earthquake, the tremors then started to spread over the following weeks and hit dozens of leading crypto-related companies invested in the project, setting off a domino effect and sparking panic selling by investors.  

Crypto lender Celsius Network halted withdrawals and transfers on the platform on June 13, citing “extreme market conditions,” and filed for bankruptcy exactly a month later in the U.S. It was one of the largest crypto lenders, with nearly US$12 billion in assets under management and around 2 million customers in May 2022. 

Singapore-based Three Arrows Capital, once a prominent crypto hedge fund that managed as much as US$10 billion, was also exposed and faced a liquidity crunch that forced it to file for Chapter 15 bankruptcy in the U.S. on July 1, 2022. 

Crypto brokerage Voyager Digital, which claimed to have 3.5 million customers with US$1.3 billion in crypto assets on its platform, filed for Chapter 11 bankruptcy on July 6, 2022, again running out of cash after Three Arrows Capital failed to service a loan from Voyager worth US$665 million. 

The next most prominent crypto business failure of 2022 came on Nov. 11 when Sam Bankman-Fried’s FTX exchange filed for bankruptcy after it failed to fulfill withdrawals. Blockchain analytics firm Nansen has said Terra-Luna’s collapse also played a part in the FTX failure. 

By the end of the year, some of the biggest and most trusted crypto projects and businesses had crumpled in the wake of the Terra-Luna crash, and cryptocurrency prices dived in the process, with Bitcoin falling nearly 65% in the year.

Noose tightens

As the Terra-Luna earthquake destabilized the cryptocurrency industry, fingers started to point and investors as well as legal authorities wanted answers. 

On May 12, Kwon’s wife sought emergency police protection after an angry Luna investor broke into their Seoul apartment complex and stood outside Kwon’s door demanding to see him, though he was believed to be in Singapore at the time.

On May 20, South Korean investors filed a lawsuit against Kwon and Shin alleging fraud. Local law firm LKB & Partners filed the complaint at the Seoul Southern District Prosecutors’ Office, which has a financial and securities crime team that took up the investigation. 

In June, Seoul prosecutors banned former employees of Terraform in South Korea from leaving the country. The following month, the prosecutors raided the private home of Daniel Shin as well as seven local cryptocurrency exchanges, including Upbit and Bithumb.

By September, prosecutors had issued an arrest warrant for Kwon and five other employees of Terraform, including former head of research Nicholas Patias. Kwon, who was believed to be in Singapore, was accused of fraud and violation of the Capital Markets Act, alleging Terraform issued an unregistered financial security in the form of the Luna cryptocurrency.

In the same month, Interpol issued a red notice on Kwon at the request of South Korean authorities. A red notice requests global law enforcement agencies to locate and provisionally arrest an individual. Korean prosecutors also requested the Foreign Affairs Ministry to nullify Kwon’s South Korean passport.

“I am not ‘on the run’ or anything similar – for any government agency that has shown interest to communicate, we are in full cooperation and we don’t have anything to hide,” Kwon tweeted on Sept. 17.

No Ponzi

In October, Kwon made an appearance on cryptocurrency writer Laura Shin’s Unchained podcast where he expressed remorse about the crash of Terra-Luna, saying mistakes were made but insisted Terra-Luna was not a fraud or ponzi scheme.

On Oct. 19, South Korea’s Foreign Affairs Ministry confirmed that Kwon’s passport will be nullified in two weeks, suggesting he would be unable to leave Singapore where he was still presumed to be still living. However, the following day, South Korean prosecutors said they had confirmed Kwon had left Singapore the prior month and transited through Dubai, United Arab Emirates.

In November, Kwon made a brief appearance on UpOnlyTV Podcast, commenting on the woes of the FTX exchange and Sam Bankman-Fried. Former hedge fund manager Martin Shkreli, who pleaded guilty to securities fraud in 2017 was also on the podcast and told Kwon that life in jail is “not the worst.”

On Dec. 2, Daniel Shin attended a court hearing in South Korea where prosecutors requested an arrest warrant. The court dismissed the request, saying Shin was not a flight risk and was  cooperating with the investigation.

In the same month, South Korean prosecutors confirmed that Kwon had made his way to Europe from Dubai and was living in the Republic of Serbia, stating that he registered a residential address in the European country. 

In February 2023, South Korea prosecutors said they had sent a team to Serbia and that the authorities will “actively cooperate” in the investigation into Kwon and charges of fraud.  

The pressure continued to build in February when the U.S. Securities and Exchange Commission (SEC) charged Terraform and Kwon with defrauding investors through “a multi-billion dollar crypto asset securities fraud,” in a complaint filed in the Southern District of New York.

Arrested

March brought a flurry of legal activitywithSingaporean police reportedly opening an investigation into Terraform Labs, and former employees of the company questioned by the Federal Bureau of Investigation and prosecutors from New York.

South Korea’s prosecutors again requested an arrest warrant for Daniel Shin, which was rejected by the court for a second time.

Then on March 23, Kwon was arrested in Podgorica airport in Montenegro, which neighbors Serbia, while reportedly attempting to travel to Dubai on allegedly forged Costa Rican passports. He was with Han Chang-joon, Terra’s chief financial officer, who was also taken into custody.

Forkast News has tried on multiple occasions to contact Kwon and Shin for comment at their social media addresses since the collapse of Terra-Luna and they have not responded.  Kwon has not responded to requests since his detention in Montenegro and Forkast has requested comment from Shin on latest developments.

Montenegro prosecutors said on March 27 that they will hold the duo for 30 days while they investigate the travel document charges.

On April 20, just days before that detention period expired, Montenegro prosecutors filed charges against Kwon and Han, alleging use of false travel documents, according to report in the local Vijesti newspaper, cited by Bloomberg. Conviction could lead to a prison term of between  three months to five years under local laws. Kwon’s legal representative in Montenegro had earlier said he will fight the case up to the Montenegro Supreme Court if necessary, stating the travel papers are valid.

Kwon now faces further time in a Montenegro jail, assuming he isn’t granted bail, but in the meantime South Korea and the U.S. are both clamoring for his extradition to face the raft of charges both countries have lined up against him, ranging from market manipulation to wire, commodities, and securities fraud.

Montenegro Justice Minister Marko Kovac said at the end of March that Washington requested the extradition of the South Korean national before Seoul. 

If Kwon does end up in the U.S. to face charges, he will join Sam Bankman-Fried as the other former crypto superstar who fell from grace. Bankman-Fried is out on a US$250 million bail and faces a likely October court date over accusations that if proven could send him to jail for decades, a fate that may also await Kwon. 

Source: Forkast

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