SEC shows Do Kwon removed 10,000 Bitcoin from Terra after collapse 

The US Securities and Exchange Commission (SEC) filed a complaint in the US District Court of the Southern District of New York on February 16. The complaint, among other things, stated that Do Kwon and Terraform siphoned 10,000 Bitcoin (BTC) from the platform and the Terra Foundation. These funds were allegedly transferred to a cold wallet and cashed out Bitcoins and transferred them into a Swiss bank account for fiat funds. According to these allegations, the founder of Terra would have access to over $100 million in cash. 

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Do Kwon removed 10.000 Bitcoin

Illustration: Milica Mijajlovic

Furthermore, the SEC alleges that Kwon and Terra artificially restored the peg to the US dollar for TerraUSD (UST). At one time, UST had the largest market capitalization of all stablecoins, despite being an algorithmic stablecoin. Algorithmic here means that it is backed by an on-chain algorithm that facilitates a change in supply and demand between the stablecoin and cryptocurrencies that prop them up. Typically, stablecoins are “over-collateralized” by fiat reserves, i.e., have actual money backing them up, but this is not the case with algorithmic stablecoins.  

SEC charges 

The SEC document lists all of the issues and frauds Kwon and Terra undertook and did so in detail across 55 pages. Some of the things mentioned in the document were speculated earlier by analysts and crypto enthusiasts; however, the SEC investigation has seemingly confirmed most of them. In short, the document clearly shows that the entire Terra system was a well-thought-out fraud. Let’s jump into some of the more important details.  

UST stability was fictitious    

Perhaps the most shocking revelation SEC made is that Terra and Kwon secretly employed a third party to purchase massive amounts of UST to return its value to $1 after it de-pegged in May 2021. This fraudulent activity returned UST’s price to $1 and returned investors’ confidence in the stability of the coin and Terra ecosystem.  

The “bailout” was never publicly disclosed, yet, Kwon used the May 2021 example of UST climbing back to $1 as the stablecoin and the ecosystem “self-healing” almost automatically. The SEC pointed to this as complete fabrication and fraudulent activity, which was undertaken to reel in new investors.    

Chai deal was fake 

South Korea’s payment platform, Chai, was often cited by Kwon as a partner which used Terra for payments. While this relationship was often scrutinized by industry experts, the SEC showed the extent to which this relationship was misrepresented to the public.  

Allegedly, Terra created a server that they internally dubbed the “LP Server,” which replicates the real transaction Chai was processing in Korean won. However, the reality was that no Chai transactions occurred on the blockchain. Therefore, not only was the relationship between Terra and Chai exaggerated, but it was completely fake, as Kwon created a fake server to move fake money around to show fake transactions. This was done solely to reel in new investors and show the success of the ecosystem.   

Cashing out on naivety 

While there were attempts by various watchdog organizations to track the funds from the Terra ecosystem, as well as affiliated entities, so far, little has been known. In December 2022, a South Korean news site claimed that Kwon cashed out $100,000 worth of BTC in Serbia.  

Here too, the SEC provides more details in their complaint. Namely, according to them, Kwon and his accomplices transferred over 10,000 BTC from Terra and Luna foundation to a cold wallet (offline wallet). Furthermore, Kwon allegedly used a Swiss bank to sell BTC and convert it into fiat funds, roughly more than $100 million and is currently hiding out somewhere in Serbia. 

Despite Kwon denying all of the charges, South Korea issued an arrest warrant after him, which led to him being placed on Interpol’s red notice. Allegedly, South Korean officials visited Serbia in search of Kwon. According to the report, South Korean prosecution and justice offices visited and sought assistance in trying to apprehend Kwon.   

After the collapse of Terra, and Kwon’s exodus from Korea, online communities sprang up to try and locate him, with initial reports pointing to Kwon being in Dubai. Allegedly, after that, he fled to Serbia, but so far, he has not been apprehended.   

The US leading the charge when it comes to regulation     

The SEC flexed its regulatory muscle in the case of Terra and Kwon, as they showed that his misconduct “constituted significant steps in furtherance.” In essence, this means that among Terra’s victims, there were a number of US customers, having an effect on the US. This gives the SEC and the US Government the right to pursue legal action against Kwon and Terra.    

Another aspect that allows SEC to act is the fact that Kwon used his Twitter account to prompt TerraUSD to US citizens.  

LUNC token 

Following the Terra ecosystem’s collapse, the native LUNC token lost almost all of its value, despite being valued closely to $117 at its peak. The token is still tradable; however, the volumes are far below what they were at its peak. Following the new developments around Kwon and SEC, the token did see an increase in activity during February.  

Of course, we hope none of our readers will take part in trading LUNC because nothing but pain and losses can be expected from those meddling with an imploded token.  

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LUNC price over the past month. Source: CoinMarketCap 

Redemption   

There still might be justice for all of Terra’s victims if the US justice system gets a hold of Kwon and the siphoned funds. The allegations made by the SEC clearly indicate that Kwon did not work alone and that there were other malicious entities that participated in the fraud. Of course, the infamous third party from May 2021 assisted in propping up UST. 

At the time of writing, it is unclear if some of the entities cooperated with the SEC and US Government when it comes to this investigation. They might have done so in return for immunity or other deals they made with US regulators. Just who these parties are is still unclear, but we’re certain it will all come to light as the investigation develops.  

Conclusion  

The Terra collapse seemed like just another day in the office in the crypto world, despite it being one of the biggest stablecoin implosions. It shook the foundation of the crypto market’s liquidity since investors started exiting crypto stablecoins en masse, which led to other stablecoins losing their pegs. More specifically, the stablecoin that had the largest market cap and was the epitome of stability, Tether (USDT), lost its peg, with users on Reddit and Twitter proclaiming the doom of crypto.     

We can, of course, learn a lot from the case of Terraform Labs and Do Kwon, how some earlier red flags pointed to potential fraud. Now, armed with the power of hindsight, we can analyze the entire situation, understand how the entire fraud functioned and what were some of the marketing tricks they used. This can help us recognize similar frauds and help us do our due diligence when deciding to invest our hard-earned money.  

For old gamers Wand, for the business community director WebMind. Front-end developer, web3 enthusiast and entrepreneur who has been in digital marketing for almost a decade.