The United States have finally gotten their hands on Do Kwon, the mysterious South Korean man responsible for one of the largest crypto-crashes in the history of the technology.
Do Kwon led Terraform, which operated two cryptocurrencies, TerraUSD (UST) and Luna. Both coins collapsed in 2022, triggering a broader sell-off in the crypto market.
The US accuses Kwon of causing the coins’ failure and claims he “orchestrated a multi-billion dollar crypto asset securities fraud.”
After South Korea issued a warrant for his arrest, Kwon fled the country. Authorities eventually apprehended him in Montenegro, where he fought extradition before being sent back following a lengthy legal battle.
UST and Luna were interconnected cryptocurrencies designed to maintain UST’s value as a stablecoin pegged to the US dollar. UST achieved this through an algorithmic mechanism with Luna: users could exchange 1 UST for $1 worth of Luna and vice versa. This arbitrage process aimed to stabilize UST’s price by adjusting supply and demand.
However, algorithmic stablecoins like TerraUSD are vulnerable to a “death spiral.” When confidence drops, users redeem UST for Luna in large volumes, flooding the market with Luna and causing its price to plummet. This devalues the collateral backing UST, exacerbating the sell-off and destabilizing both tokens.
Future algorithmic stablecoins may fail if they lack sufficient reserves, rely too heavily on market confidence, or cannot handle sudden surges in redemptions during market downturns. Enhanced regulatory scrutiny and improved reserve mechanisms could mitigate these risks.
The resulting death spiral cost American investors approximately $40 billion and now the United States authorities want to know why.
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Terraform labs lost 99% of its value in two days
A Montenegro court previously found Do Kwon guilty of forging documents after authorities arrested him in March 2023 while he attempted to board a plane to Dubai.
Uncertainty surrounded whether he would face criminal proceedings in the US, as Montenegro lacks extradition treaties with both the US and South Korea, which also sought his extradition.
Montenegro’s decision to send Kwon to the US finally ends a legal battle that lasted more than 18 months.
The Montenegrin Ministry of Justice approved Do Kwon’s extradition earlier in December, stating that he had also agreed to the decision.
Kwon’s firm, Terraform Labs, gained widespread attention in 2021 when its coins, Luna and TerraUSD, surged in popularity. Fans of Luna called themselves “Lunatics” and referred to Kwon as their “king.”
Despite significant investment in the coins, Terraform Labs collapsed catastrophically on 9 May 2022, losing more than 99 per cent of its value within 48 hours.
Investors rushed to withdraw their money from other cryptocurrencies, fearing a similar collapse, which caused values to plummet across the entire sector.
Analysts estimate that the so-called “cryptocrash” wiped out USD$400 billion in value. Bitcoin has since recovered, briefly surpassing USD$100,000 per coin in December.
In January 2024, Terraform Labs filed for bankruptcy in the US.
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