Details of Luna founder's defeat revealed, Korean crypto tycoon's fate in doubt

Source: Wired

Compilation: BitpushNews Yanan

Recently, South Korean cryptocurrency company Terraform Labs and its subsidiary Do Kwon were found guilty of fraud and fraud. The ruling provides a ray of justice for investors who have invested billions in crypto assets only to see their value drop to almost zero. These investors saw the truth, and those who had invested huge amounts of money in crypto assets watched their value drop to almost zero.

The origin of this civil lawsuit can be traced back to February 2023, when the U.S. Securities and Exchange Commission (SEC)-the regulator responsible for protecting the rights and interests of investors The agency took the initiative and filed a civil lawsuit against Kwon and Terraform. The indictment details how the defendants orchestrated a fraud that resulted in the market losing as much as $40 billion in wealth. They weaved a beautiful lie to investors to exaggerate the prospects and stability of the cryptographic tokens they issued. The lie caused countless people to fall into this financial whirlpool.

After the market crash in 2022, Kwon embarked on the path of absconding. Not only does he face criminal charges in the United States, he is also the subject of a manhunt by South Korean police. The former crypto tycoon was recently released on bail from a prison in Montenegro, where he was arrested last year and is now awaiting extradition.

In the absence of Kwon, the jury in the Southern New York District of the United States listened carefully to the testimony of investors who purchased Terraform tokens, whistleblowers within the company who had worked with Terraform, and other key witnesses. After less than two hours of in-depth deliberations, the jury unanimously found Kwon and Terraform clearly liable for civil fraud by making false statements and misleading investors.

Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a subsequent statement: “We are pleased with today’s jury verdict, which clearly confirms that Terraform Labs and Do Kwon were responsible for a large-scale Crypto fraud is responsible. While crypto investing may seem promising and full of great promises, it lacks the necessary compliance measures, resulting in extremely serious consequences for real-world investors. We will continue to stand firm Unswervingly maintain market fairness, transparency and order, and protect the legitimate rights and interests of investors." The word count should not exceed 434.

Market analyst Noelle Acheson, who previously worked at cryptocurrency brokerage Genesis Trading, said the outcome of Kwon’s civil trial, as well as the recent verdict against cryptocurrency exchange FTX founder Sam Bankman-Fried, marks a change in the crypto industry. The end of a painful period. Acheson commented: "Many people are deeply saddened by Do Kwon's behavior. Those investors feel betrayed." She further pointed out: "I hope these incidents can remind people to do their homework before investing and make more targeted suggestions." Sexual issues to avoid being fooled by empty and unrealistic promises again."

Kwon founded Terraform in 2018 with co-founder Daniel Shin. In 2020, the company ambitiously announced the launch of a stablecoin called TerraUSD (UST), claiming that its value would be pegged to the U.S. dollar, providing investors with a safe haven from market volatility in other crypto assets.

Stablecoins typically maintain their specific value through a basket of underlying assets, such as cash and short-term government bonds, and allow investors to redeem them at any time. However, Terraform claims that UST will use a unique mechanism to maintain its value link to the U.S. dollar with the help of a complex algorithm by being pegged to another token issued by the company called LUNA. If the value of UST deviates from $1, traders would theoretically be incentivized to return the value to the target level by buying or selling the stablecoin.

At the beginning of 2022, UST and LUNA were very popular. LUNA once became the top 10 cryptocurrencies in the global circulation currency value, and UST also followed closely and performed well. Acheson said: "This mechanism is interesting and novel, and many smart people believed that it could work successfully at the time."

In May 2022, a sudden storm swept the cryptocurrency market. When large numbers of UST holders began selling the token in bulk, UST quickly broke away from its peg to the U.S. dollar, panicking the market and triggering a broader sell-off that saw the price of UST fall to almost zero. At the same time, other tokens related to LUNA and Terraform also suffered heavy losses, losing significantly in market value. Acheson said in response: “UST’s purported smart mechanism is based on the false assumption that people expect it to self-correct, so it can self-correct.” She further pointed out: “[Kwon] is very concerned about the stability of stablecoins. Sex has made unrealistic marketing propaganda and misled many investors."

This incident not only plunged the crypto market into a downward spiral, but also triggered a series of chain reactions. As a result, a series of crypto companies have fallen into trouble, starting with hedge fund Three Arrows Capital, which declared bankruptcy in June. Subsequently, crypto lending companies Voyager Digital, BlockFi, and Genesis also fell into trouble, which even indirectly affected the stability of other large crypto companies such as FTX. This storm has made the entire encryption industry feel an unprecedented chill.

After this series of events, Terraform founder Kwon fled from Singapore to Dubai and then to Serbia. However, he was eventually arrested in Montenegro. Meanwhile, Kwon was sentenced to four months in prison for trying to flee the country using a forged Costa Rican passport. Market analyst Acheson pointed out that the "arrogance" attitude displayed by Kwon actually reflects some of the long-standing problems in the encryption ecosystem.

The SEC’s lawsuit against Kwon and Terraform focuses on two core allegations. First, they were accused of misleading investors by claiming that UST had the ability to self-recover to a U.S. dollar valuation without outside intervention. Secondly, they were accused of falsely claiming that Chai, a large Korean payment company, uses Terraform technology for business operations. This false propaganda caused investors to have exaggerated expectations for the broad application prospects of UST.

Additionally, the SEC alleged that Kwon entered into a secret agreement with trading firm Jump Trading in May 2021 after UST first departed from its anchor price. Under the agreement, Jump Trading agreed to purchase large quantities of UST tokens to assist in its return to its target value. During the trial, an insider who worked as a software developer at Jump Trading testified as a whistleblower, confirming the existence of this agreement. However, during the SEC investigation, Jump Trading's president declined to comment on the matter, citing his Fifth Amendment rights involving self-incrimination. Notably, Jump Trading has not been sued by the SEC.

According to the SEC’s charges, while Jump Trading stepped in to artificially help UST restore its U.S. dollar valuation, Kwon and Terraform began issuing misleading public statements claiming that the token was designed through a unique mechanism Able to "automatically self-repair". This kind of contradictory behavior and remarks caused investors to seriously misjudge the true situation of UST.

Additionally, another SEC whistleblower and a former Chai executive testified that the payments company did not use Terraform technology for transaction processing or settlement, as Kwon claimed. Shockingly, Terraform is also accused of artificially replicating Chai’s transaction records on its network to create the appearance of legitimate transactions. To substantiate the allegation, the SEC submitted to the court transcripts of communications between the two Terraform co-founders. In the notes, Kwon advised them to create "fake transactions that look real" and promised to "try my best to make them indistinguishable."

Reacting to the SEC's offensive, Daniel Silva, a former U.S. attorney now at the Buchalter law firm, said the charges were "very strong." He explained: "When someone deliberately lies, it becomes very simple. Although the word 'fraud' sounds serious, in fact it refers to deliberately lying for the purpose of obtaining gain. Everyone knows that lying is It’s not right — or at least you’re going to get yourself in trouble.” In court, the defense vigorously defended the distinction between Terraform’s crypto-assets failure and the SEC’s alleged fraud. Kwon's lawyer David Patton made it clear in his opening statement: "Failure does not mean fraud." He emphasized that investors had a full understanding of the relevant risk characteristics when investing.

The defense also sought to cast doubt on the credibility of SEC whistleblowers, suggesting they may have chosen to come forward motivated by the pursuit of financial gain. Meanwhile, the defense also lambasted statements by former Jump Trading employees as mere hearsay rather than solid evidence. Additionally, the defense further undermined the credibility of Chai's testimony by describing the company's whistleblower as a disgruntled former employee.

In addition, the defense insisted that Chai Company had indeed used Terraform’s blockchain technology. Without access to Chai's company source code, the defense maintained that the SEC could not prove the truth of its allegations. Regarding the evidence submitted by the SEC regarding the communication records between Shin and Kwon regarding "sham transactions," the defense stated that these records were not directly related to this case, but related to other items.

In the end, the jury did not adopt the defense’s view.

After being found responsible, Kwon and Terraform will face corresponding financial penalties, the specific amount of which will be determined by the judge at a later stage. In addition, they may be prohibited from participating in future U.S. securities market activities. However, the impact of this case goes far beyond that.

Prior to the trial, the defense had sought to have the charges dismissed on the grounds that the SEC erroneously classified UST, LUNA and other Terraform tokens as securities, insisting that the SEC had no jurisdiction over them. In fact, the issue of the classification of cryptocurrencies has been at the core of many legal disputes in crypto cases in the United States. These disputes not only involve the SEC’s entanglements with companies such as Ripple and Coinbase, but also reflect the entire crypto industry’s views on regulators. Industry insiders have repeatedly criticized the SEC’s “enforcement and regulatory” approach, which relies more on legal actions rather than formulating clear rules to guide industry development. They worry that this regulatory approach will hinder innovation and seek to expand the scope of regulators. The outcome of this case will undoubtedly have a profound impact on these disputes and will also provide an important reference for the future regulatory direction of the encryption industry.

However, before the trial, the New York judge presiding over the case, Jed Rakoff, issued an opinion explicitly rejecting the defense's request to dismiss the charges. The judge ruled that the SEC has the power to "address new issues arising from emerging technologies, particularly when those technologies impact markets that are at least superficially similar to securities markets."

Although this opinion will not force other U.S. judges to follow it, considering the SEC’s victory in this case, it actually provides a situation for crypto companies to be punished for violating U.S. securities laws. A clear precedent provides an important reference for similar cases in the future. In this regard, Lisa Bragança, a lawyer at Bragança Law and a former SEC branch director, said: "This case was heard by a well-respected and meticulous judge, and his influence cannot be ignored. It is foreseeable that his decision will be Will be cited multiple times by other judges in the future."

Before the trial, Terraform had stated that they would appeal if faced with an adverse verdict, citing continued ambiguity regarding token classification. "Considering that Kwon was previously unable to appear in court in person, sit in the lawyer's chair, listen to witness testimony and respond in person, Terraform's appeal request may be supported," Lisa Bragança said.

In a publicly released statement, a spokesperson for Terraform expressed strong dissatisfaction with the verdict. They insist that the verdict lacks sufficient evidence to support it and is more like a piece of paper. What is even more difficult for them to accept is that they believe that the SEC has no authority to bring this lawsuit. Currently, they are carefully weighing various options and fully preparing for the next action.

At this critical moment, the U.S. Congress has failed to provide clear legislative guidance, leaving the entire encryption industry in confusion. Silva knows that this thorny classification issue can only be truly resolved when a representative cryptocurrency case goes through rigorous review by an appeals court and even eventually reaches the threshold of the U.S. Supreme Court. He lamented: "The development of the law is always accompanied by controversy and uncertainty. Each new case is like a touchstone, making the law more clear. But now, we are still groping forward."

Even though he is in Montenegro, thousands of kilometers away from New York, Kwon's influence has not diminished. He will still play a key role behind the scenes and influence the direction of this case. His presence makes this legal battle more complicated and confusing, and makes people look forward to the final outcome.

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