Terraform Lab’s Do Kwon is facing a US$56.9 million lawsuit in Singapore over his role in the Terra-Luna crash that occurred in May this year.
The lawsuit, led by Spanish citizen Julian Moreno Beltran and Singaporean Douglas Gan, was filed against Terraform Labs, the Luna Foundation Guard, as well as co-founder Do Kwon and head researcher Nikolaos Alexandros Platias. Both the Luna Foundation Guard and Terraform Labs are registered in Singapore.
Beltran and Gan represent a total of 359 plaintiffs, who claim to have been misled into believing that the UST system was designed to have a relatively stable price, and have since suffered heavy losses after the tokens crashed.
The sum of US$56.9 million that is being sought is the difference in value between the sum in US dollars that they believed that their assets were worth, and the value of their assets after the crash.
According to the plaintiffs, Do Kwon was aware of the structural weakness of UST, but still induced investors into purchasing UST with fraudulent misrepresentations.
The three fraudulent claims that the defendants have been accused of making were that UST was stable by design, that the Terra protocol would be able to maintain the price stability of UST regardless of market size, volatility, or demand through its algorithm, and that UST holders would always be able to exchange 1 UST for 1 USD’s worth of LUNA on the Terra Protocol.
Terraform Labs has responded to the claims, saying that “there is a fundamental difference between a public market event and fraud”. Terraform Labs has also asserted that risks of buying Terra or Luna were publicly known and discussed, and that the underlying code was open-sourced.
According to court documents, Do Kwon, Terraform Labs, and the Luna Foundation Guard are represented by lawyers from Dentons Rodyk, while Nikolaos Alexandros Platias is represented by lawyers from Rajah & Tann.
The lawsuit was filed in the Singapore high court on September 23, and hearings have already begun, with the most recent one on November 2. The next case conference is expected to take place on November 16, when the court is expected to set timelines and give further directions.
Do Kwon – web developer and rising star?
This isn’t even Terraform Labs’ and Do Kwon’s only legal case. Weeks after the initial crash, a first lawsuit was filed in South Korea. This lawsuit represented five investors, with an accumulated loss of around 1.4 billion Korean Won (S$1.4 million)
On top of this, Do Kwon had previously been served a subpoena during a US Securities and Exchange Commission (SEC) investigation into Mirror Protocol in 2021. Do Kwon then sued the SEC over the way they they served him the subpoena.
The target on Do Kwon’s back keeps growing — South Korea has issued an arrest warrant on Do Kwon, and Interpol has also issued a red notice for him. Do Kwon has since fled from Singapore and his whereabouts are not known.
According to KBS, Kwon has moved to Europe via Dubai. That being said, Do Kwon has denied that he is on the run, and that every time the location where he lives becomes known, it becomes almost impossible for him to live there.
Yet, just six months ago, Do Kwon was on top of the world. The Luna Token was climbing to new heights, and Terra UST was one of the largest cryptocurrencies by market cap.
To begin, we should start with Terraform Labs, and Do Kwon’s undeniable presence on Twitter. Do Kwon pushed Luna and Terra hard on Twitter, and was famously unreceptive to criticism. Anyone who disagreed with him or was sceptical of the ecosystem was immediately derided online as being poor.
At the time, Do Kwon may have had the results to back his pride and brash attitude — the price of Luna was on the rise, and considered a blue chip token, something safe to invest in.
But how much of this was hot air and bluster would come to be revealed in time.
Part of what drew investors into the Terra-Luna ecosystem was the Anchor Protocol. It was built on the Terra Blockchain, and offered almost 20 per cent interest rates at a time where banks were offering one per cent on deposits.
A red flag for more experienced investors perhaps, but to many, this was a good deal — and it served to draw in huge investment for Terra and Luna, and the price of Luna tokens began to rise, and being valued at above US$100 per token.
The fall from grace
But in March this year, the protocol announced that interest rates would begin to shift to “more sustainable rates” and in May, Anchor reduced the interest rate to 18 per cent. This prompted an exodus of capital, and confidence in the entire system began to erode.
As the crisis unfolded, Do Kwon tweeted a humble apology to his followers, and promised to try to fix what he had done.
To his credit, he did keep working on the Terra ecosystem and proposing new changes that he promised would revive the blockchain.
Around this time, however, accusations of misconduct and fraud were already beginning to surface, and the first lawsuit was filed in South Korea around May 20.
The very same week, Do Kwon and the Luna Foundation Guard presented investors with their proposal. Terra and Luna would be revived on a new blockchain, with no shared history with the crashed tokens. Luna 2.0 tokens would be airdropped to investors, and the system would no longer have a stablecoin.
According to the protocol, anyone who held Luna would have a chance to vote on this proposal, with their voting power being proportional to the amount of Luna that they held. The final vote ended on May 25, with 65 per cent of those who voted approving of Do Kwon’s plan.
This number, however, is not necessarily an accurate representation of the community’s support, as I have pointed out previously — the Luna Foundation Guard alone controlled around 60 per cent of the voting power, meaning that any proposal that they backed would effectively pass.
At this point, the crypto winter was in full swing. Companies like Celsius and Three Arrows Capital were collapsing because of their investments in Luna, and there were even cases of suicide after people lost large sums of money from the crash.
In July, investors in the US brought a class-action lawsuit against Do Kwon, Nikolais, Terraform Labs, Jump Crypto, GSR, and Three Arrows Capital. This lawsuit claimed that Terraform Labs, along with the other defendants, were responsible for leading retail investors into purchasing Luna and Terra at ‘inflated prices’, making or endorsing false or misleading statements, civil conspiracy and racketeering, among other charges.
In September, the first arrest warrant for Do Kwon was issued by the Seoul Southern District Prosecutor’s office. While the arrest warrant listed Do Kwon as residing in Singapore, the Singapore Police Force later confirmed mid-September that Do Kwon was not in Singapore, and that they would assist the South Korean Police.
Later in September, this was followed by Interpol issuing a red notice on Do Kwon. While a red notice is not an arrest warrant per se, it is a request for law enforcement in all countries to assist in locating and provisionally arresting a person pending extradition, surrender, or similar legal action.
During this time, Do Kwon is believed to have left Singapore entirely and travelled to Europe, through a transit in Dubai. Since then, his exact whereabouts have been unknown, although he has continued to be active on Twitter.
In October, South Korea ordered the cancellation of Do Kwon’s passport as well, in an effort to force his surrender and make it more difficult for him to travel.
According to an interview on the Unchained Podcast that was uploaded three weeks ago, Do Kwon has not seen the arrest warrant, and the only information he has is what is available through the media.
On November 4, Do Kwon tweeted that he would hold a meetup or conference soon to “get over this in hiding bs”, and that “cops from (the) world over (are) welcome to attend”. Since then, he has not provided any updates on this.
Do Kwon has, however, appeared on a Twitch stream on UpOnlyTV, a stream focused on crypto discussions.
On November 9, Do Kwon joined the stream, to the surprise of many, and was queried on his take on the Binance acquisition of FTX, and if he had any advice for FTX founder Sam Bankman-Fried. In response, Do Kwon replied that he “did not think he was the best person to ask for advice”, and admitted that he did not believe he handled Terraform Lab’s collapse particularly well.
What can we learn from Do Kwon’s story?
Do Kwon’s story is one of hubris, but it is also a cautionary tale for investors.
In some sense, Terraform Labs is right to say that investors should have done their own research. Terra was indeed an open-source blockchain, meaning that anyone could have taken a look at the inner workings of the tokens and their economics, and come to the same conclusion that many on Twitter were already pointing out — that Terra and Luna prices could not hold up in the event of a mass exodus of capital.
Then again, not everyone is a programmer capable of understanding the code that the Terra blockchain operates on, and as a key developer and the company’s CEO, Do Kwon must bear some responsibility for the imperfections of his project.
But, as Terraform Labs has pointed out, this is not the same as fraud. The lawsuit in Singapore specifically accuses Do Kwon of fraudulent misrepresentation, and the burden of proof lies with them to prove this. This means proving that Do Kwon knew about the flaws within the Terra Protocol, and that despite this, he intentionally lied to them to get them to invest — quite the tall task.
Do Kwon was supremely confident about his project, and pushed for people to buy Luna. This much was true, but shilling the token is not the same as forcing investors to buy it. He can show you the door, but you must be the one to walk through it.
While the question of whether Do Kwon knew about the flaws in the blockchain remains an open question, what is cut and dried is that those who invested did so of their own free will — or at least, none have claimed otherwise.
These people have made their beds and must now sleep in it. After all, the Terra ecosystem and its Luna tokens were not a service that Do Kwon and Terraform Labs failed to deliver — they were a risky bet that many called an investment.
While the lawyers battle it out, it seems that there is little that can be done to recover the billions of dollars that have been sunk into the Terra ecosystem — but a loss is only a loss if you fail to learn from it.
Do Kwon’s story and the ensuing scandal are full of useful lessons. It is time that we learned from it instead of simply playing the blame game and pointing fingers. Because honestly, there are few, if any, innocent parties in this debacle, when greed and hubris has made fools of us all.
Featured Image Credit: Bloomberg