Prosecutors in South Korea have asked Interpol to issue a red notice for Do Kwon, the founder of the TerraUSD (UST-USD) algorithmic stablecoin that caused a cataclysmic crash of the entire cryptocurrency market in May 2022. Yahoo Finance investigates the man behind the collapsed algorithmic stablecoin project and the reasons for its failure.
South Korean authorities allege that Do Kwon is refusing to cooperate with their investigation, however, the Terraform Labs developer denies he is trying to avoid attempts to bring him in for questioning.
On Monday, the Seoul Southern District Prosecutors’ Office asked South Korea’s foreign ministry to cancel Do Kwon’s South Korean passport.
The official body stated that he is “obviously on the run and has no intention to appear before us for questioning”.
The statement added: “We have begun the procedure to place him on the Interpol red notice list and revoke his passport."
Who is Do Kwon?
South Korean developer Do Kwon is the founder of the now defunct Singapore-based Terraform Labs, the company behind the Terra blockchain, that featured the failed stablecoin TerraUSD (UST-USD) and its accompanying digital asset token called Terra, which was listed on crypto-exchanges as LUNA (LUNA-USD).
The outspoken developer had a brief spell in the limelight before his algorithmic-stablecoin experiment collapsed spectacularly.
Do Kwon's stardom reached its peak when the price of the Luna digital asset reached $119 (£105) in early May 2022. Luna was bought and sold algorithmically, so the TerraUSD stablecoin could keep its dollar peg.
His fame rose to the point where his Terra/Luna algorithmic stablecoin reached a cult following and some advocates got tattoos of the Luna symbol, and others referred to Do Kwon as, “the Korean Elon Musk”.
Kwon was always outspoken on Twitter in defence of the algorithmic stablecoin that he founded, and on Saturday, Kwon took to Twitter (TWTR) again. This time in response to the rumours that he was playing a cat and mouse game with authorities in South Korea.
The fallen crypto-founder tweeted: "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"
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
— Do Kwon 🌕 (@stablekwon) September 17, 2022
Why does South Korea want to question him?
Despite Do Kwon's claim that he is "not on the run", South Korean prosecutors said he disbanded the South Korean unit of Terraform Labs and left for Singapore at the end of April.
A spokesperson for the Seoul Southern District Prosecutors’ Office said: “We are doing our best to locate and arrest him."
Prosecutors from South Korea claim Kwon has indulged in financial fraud and are investigating him and his company on behalf of two complaints filed by investors who allege Terraform Labs deceived them.
This led to authorities in Seoul initiating the request for a red notice with Interpol, which according to the Interpol website, is a request to law enforcement worldwide to “locate and provisionally arrest a person pending extradition, surrender or similar legal action".
South Korean prosecutors have also raided the home of Terraform Labs co-founder Daniel Shin.
Authorities in Seoul have been investigating whether fraudulent activities were behind TerraUSD's collapse.
Why did TerraUSD collapse?
The algorithmic stablecoin TerraUSD, or UST, crashed almost completely on Thursday May 12.
UST lost its peg to the dollar, tanking to a low as $0.26. Meanwhile, the day before, on Wednesday 11 May, TerraUSD’s sister token Luna fell by more than 97% dropping below $0.22, and by Friday May 13, Luna collapsed from around $80 – to nearly $0.
The sudden sell-off of Luna crashed the price of both LUNA and UST.
According to Chainalysis data, on May 7, a cryptocurrency trader swapped 85 million UST for the one to one dollar reserve stablecoin USDC. In the next hour, another trader then swapped a total of 100 million UST for USDC.
This was the beginning of an investors panic, and a sell-off began.
Many holders with their UST deposited in the Anchor Protocol that had been offering almost 20% annual interest on staked UST started to withdraw their funds.
Nearly three quarters of all UST was deposited in Anchor Protocol, indicating that a significant reason for holding UST may have been to earn Anchor’s yields.
Terraform Labs then began to sell billions of bitcoin reserves to buy UST to keep up with redemptions.
Also, holders of UST were able to 'burn' UST for an equivalent amount of Luna, and many investors did this en masse, inflating the price of Luna. Supply of Luna entered the trillions; and so prices fell to fractions of a cent. The algorithm that balanced the Luna reserve to UST was not able to keep up and the stablecoin project collapsed.
What impact has it had on the crypto market?
Korean cryptocurrency founder Do Kwon's rapid rise and spectacular fall is a story of hubris, bankruptcy and personal tragedy.
During his rise, the computer scientist was dismissive of the growing scrutiny as to how an associated decentralised finance application called Anchor Protocol could generate an abnormally high interest of 20% on UST stablecoin deposits.
Read more: Crypto live prices
Before the cataclysmic crash, from which the crypto-market has yet to recover, major crypto-lenders such as the Celsius Network (CEL-USD), Voyager Digital (VOYG.TO), and hedge-fund Three Arrows Capital (3AC) had invested their client's assets into the high return scheme.
But when the high-interest deposit scheme swiftly unravelled in early May 2022, almost $45bn (£39bn) in crypto-market capitalisation was wiped out over the course of a week.
It is worth noting that the US Security Exchange Commission, SEC, had been concerned with the rates that these crypto lenders were offering retail investors months before the crash, rates that far outpaced traditional bank savings accounts and other kinds of interest-bearing deposits
The collapse of TerraUSD took the Celsius Network, Voyager Digital and Three Arrows Capital with it.
The contagion spread rapidly and caused the value of blue-chip cryptocurrencies such as ethereum (ETH-USD) and bitcoin (BTC-USD) to fall off a shelf. Bitcoin fell from around $40,000 to approximately $20,000 in the weeks following the crash, ethereum followed with a fall from around $3,000 to approximately $1,000.
Also, after many individuals had deposited their UST (UST-USD) into Anchor Protocol, to gain the 20% annual percentage yield (APY), the resulting collapse liquidated life savings and was the reported cause of multiple suicide attempts and other personal tragedies.
The hunt for Kwon’s comes amid another downturn in cryptocurrency markets, with ethereum down around 20%, despite the successful transition to a proof of stake consensus mechanism.