Do Kwon, the creator of the cryptocurrencies Luna and TerraUSD, has become one of the most hated men in South Korea after a Seoul court issued an arrest warrant for him this week over his alleged role in the collapse of the global cryptocurrency market earlier this year.
The sudden collapse of the cryptocurrencies in May triggered losses in the billions of dollars among investors both large and small, and led South Korean authorities to issue an arrest warrant Wednesday for Kwon. As the co-founder and CEO of the Terraform Labs cryptocurrency ecosystem, Kwon stands accused of stock exchange violations and fraud.
South Korean authorities seek to void #Terra cofounder Do Kwon’s passport
JUST IN: ???????? South Korean authorities seek to void #Terra cofounder Do Kwon's passport
>>> The South Korean Ministry of Foreign Affairs has now asked Do Kwon to return his passport.
September 14 Do Kwon & five other individuals received an arrest warrant pic.twitter.com/ETzasAiAwA
— OAK Chain (@oakchain_) September 15, 2022
The digital sector is still reverberating from the devastating financial losses and the company’s spectacular demise that have turned the 30-year-old crypto entrepreneur into arguably the most hated man in South Korea. Adding to the scandal is the fact that Kwon has become a fugitive.
Although his whereabouts remain unknown, he continues to be visible on Twitter. He has posted apologies and even promised a triumphant comeback.
‘The financial guru of a cult’
Seoul authorities, meanwhile, suspect he is hiding in Singapore as Kwon has offices in the Asian city-state, which does not have an extradition treaty with South Korea.
They are hesitating between several avenues to bring the engineer out of hiding, said the Financial Times, and have raised the idea of cancelling his passport or asking Interpol to issue a red alert – both of which would impede the fugitive’s ability to travel.
Due to the magnitude of the financial harm suffered largely by South Koreans as a result of the downfall of Kwon’s crypto-empires, Seoul is determined to do everything possible to bring him to justice. In all, nearly 200,000 people lost money after investing in Luna or TerraUSD. Hashed – a powerful investment fund specialising in digital assets that suffered $3 billion in losses – was among them.
Understanding why so many took a gamble on Kwon has a lot to do with the power of social media – he managed to attract a vast network of followers. “He was almost like the financial guru of a cult,” said Donghwan Kim, a South Korean investment adviser in an interview with the Financial Times.
From Stanford to the ruthless world of cryptocurrencies
Kwon had the profile of a computer genius. He graduated from Stanford University with a degree in computer engineering at the age of 24 in 2015 and then worked for two Silicon Valley behemoths: Microsoft and Apple.
Three years later, he embarked on the cryptocurrency path by founding TerraUSD and Luna. The former was a “stablecoin”, a cryptocurrency whose value is pegged to the price of another asset and is therefore considered “stable”. In the highly volatile and ruthless world of bitcoin and ethereum, these cryptocurrencies are considered safe havens – the most famous of which is Tether – making them attractive to investors.
The price of stablecoins hardly fluctuates because they are usually pegged to real currencies with low volatility, such as the dollar. But this was not the case with TerraUSD, which was indexed to Luna, the other cryptocurrency created by Kwon. It was the latter that was supposed to ensure the stability of the system, thanks to in-house algorithms.
Ultimately, those algorithms failed, sending the two cryptocurrencies tumbling in May. But back when Kwon was developing them in the late 2010s, algorithmic finesse didn’t matter so much. Cryptocurrencies were in vogue among unsuspecting investors, and Kwon’s larger-than-life personality made Luna stand out from the competition.
“Do Kwon quickly realised that playing this role [the larger-than-life personality] would make it easier to draw attention to himself and his projects,” said tech news site The Verge.
‘I don’t argue with the poor’
It was on Twitter that Kwon spent most of his time taking his competitors and detractors to task. When an economist in May 2021 questioned Kwon on how TerraUSD’s algorithms were being used he replied: “I don’t argue with the poor.” When asked where the hundreds of millions of dollars Kwon claimed to have in reserve to back TerraUSD came from, an investor was told “from your mother, of course”.
I don’t debate the poor on Twitter, and sorry I don’t have any change on me for her at the moment.
— Do Kwon ???? (@stablekwon) July 1, 2021
Kwon’s displays of arrogance and odiousness were not just confined to Twitter. A few days before Luna crashed, Kwon was on YouTube declaring that “95% of cryptocurrency projects are going to crash” before adding that this “will be entertaining to watch”.
The comments gave Luna followers the impression that Kwon believed he was above the rest of the crypto pack and that he was fighting tooth and nail for their interests against an outside world that just didn’t get it, reported the New York Times.
“It’s a cult mentality with a leader who has a larger-than-life personality and at the same time he has a confidence that is very seductive,” Brad Nickel, a podcast host specialising in cryptocurrencies, told The New York Times.
Kwon’s most fanatical admirers even called themselves the “Lunatics”, naming themselves after Luna. One of them, Mike Novogratz, the CEO of the investment fund Galaxy Investment Partners, even got a Luna tattoo.
But it all started to unravel when Do Kwon tried to attract new followers by offering a programme that paid Terra holders an astronomical 20 percent interest per year.
The popularity of Luna/Terra exploded, especially in South Korea, where the offer attracted tens of thousands of large and small-time investors. As more and more TerraUSDs circulated, the value of the currency plummeted and the algorithmic mechanism designed to stabilise its price failed to work. The whole thing imploded in a matter of days.
Many small investors got caught up in the fallout.
“I was trying my best to always put some money aside, but with inflation in South Korea, traditional bank investments weren’t paying off,” Ji-hye, a South Korean office worker who was lured by the prospect of a 20 percent return, told the Financial Times. “At first, I saw the value of my savings skyrocket, so I bet everything on Luna. And in the end, I lost everything.”
In South Korea, the shockwaves from Luna’s collapse were so great that online searches for Mapo Bridge – a bridge in Seoul known as one of the most popular places to commit suicide – skyrocketed, the Financial Times reported. Police had even increased patrols around the area during summer.