Do Hyeong Kwon, 33, a South Korean citizen, was extradited from Montenegro Thursday face fraud charges. A newly unsealed indictment accuses Kwon, the co-founder and former CEO of Terraform Labs PTE Ltd., of orchestrating schemes to defraud investors and artificially inflate the value of Terraform’s cryptocurrencies.
Kwon arrived in the U.S. Tuesday.
“Do Hyeong Kwon will now be held accountable in an American courtroom for, as alleged in court documents, his elaborate schemes involving Terraform’s cryptocurrencies, which resulted in over $40 billion in investor losses,” said Attorney General Merrick B. Garland. “We secured this extradition despite Kwon’s alleged attempt to cover his tracks by laundering proceeds of his schemes and trying to use a fraudulent passport to travel to a country that did not have an extradition treaty with the United States.”
“Do Kwon, co-founder and former CEO of Terraform, allegedly defrauded investors by falsely advertising the company’s blockchain products as decentralized, reliable, and effective, and by engaging in market manipulation, ultimately resulting in more than $40 billion in investor losses,” said Assistant Director in Charge James E. Dennehy of the FBI New York Field Office. “For at least four years, Kwon allegedly played puppet master to maintain this crafted illusion and ensnare investors.”
From 2018 to 2022, Do Hyeong Kwon allegedly orchestrated schemes to defraud investors in Terraform’s cryptocurrencies, according to the indictment.
Kwon is accused of making false claims about the stability of Terraform’s stablecoin protocol, the capabilities of its blockchain technology, and the reliability of its financial systems.
Despite these claims, Kwon allegedly knew that key Terraform products did not function as advertised. Instead, he manipulated them to create a false appearance of a stable and decentralized financial system.
This deception inflated the value of Terraform’s cryptocurrencies, which Kwon and his controlled entities held in large amounts and sold to investors for billions of dollars in other assets.
If convicted of all charges, Kwon faces a maximum penalty of 130 years in prison.
Kwon’s misrepresentations included the following:
- The Stablecoin Misrepresentations: Kwon made misrepresentations about the effectiveness of the system that lay at the heart of Terraform’s cryptocurrency empire, the “Terra Protocol,” which purportedly used a computer algorithm to maintain the value of Terraform’s so-called “stablecoin” pegged to the U.S. dollar, TerraUSD (UST), at a value of $1 for one UST. But as Kwon knew, after the Terra Protocol failed to cause the restoration of UST’s $1 peg in May 2021, Kwon reached an agreement with executives at a high-frequency trading firm (the Trading Firm) so that the Trading Firm would purchase large amounts of UST in order to artificially support UST’s $1 peg.
- The LFG Misrepresentations: Kwon made misrepresentations about the governance of the Luna Foundation Guard Ltd. (LFG), which Kwon claimed was managed by an independent governing body and was tasked with deploying billions of dollars’ worth of financial reserves to defend UST’s peg. But as Kwon knew, he controlled both the LFG and Terraform. In addition, Kwon misappropriated hundreds of millions of dollars in assets from the LFG. Kwon and others acting at his direction sought to launder those misappropriated funds through transactions designed to conceal and disguise the nature, location, source, ownership, and control of the funds.
- The Mirror Misrepresentations: Kwon made misrepresentations about the success and operation of an investing platform on Terraform’s blockchain (the Terra blockchain) called Mirror Protocol (Mirror), that purportedly allowed users to create, buy, and sell synthetic versions of stocks listed on U.S. securities exchanges. Kwon claimed that Mirror operated in a decentralized manner and that he and Terraform played no role in Mirror’s governance. But as Kwon knew, he and Terraform secretly maintained control over Mirror, and used automated trading bots to manipulate the prices of synthetic assets that Mirror issued. Kwon also caused Terraform to inflate key user metrics to deceive investors.
- The Chai Misrepresentations: Kwon falsely claimed that the Terra blockchain was being used to process billions of dollars in financial transactions for the Korean payment-processing application Chai. In doing so, Kwon claimed that the Terra blockchain had “real world” applications or uses, as distinct from competing cryptocurrency platforms. But as Kwon knew, Chai processed transactions through traditional financial processing networks, not the Terra blockchain.
- The Genesis Coin Misrepresentations: Kwon made misrepresentations about the use of a supply of one billion stablecoins programmed into the Terra blockchain at its creation (the Genesis Stablecoins), which were purportedly held in reserve for Terraform for certain specified uses. But Kwon used at least $145 million worth of Genesis Stablecoins, among other things, to fund fake Chai blockchain transactions and trading bots to manipulate the prices of synthetic assets that Mirror issued.
Kwon’s alleged misrepresentations include the following:
- Stablecoin Misrepresentations: Kwon claimed the Terra Protocol maintained the value of Terraform’s stablecoin, TerraUSD (UST), at $1 using a computer algorithm. However, after the protocol failed in May 2021, Kwon arranged for a high-frequency trading firm to artificially support UST’s $1 peg by purchasing large amounts of UST.
- LFG Misrepresentations: Kwon falsely stated that the Luna Foundation Guard (LFG) was managed by an independent body to defend UST’s peg with billions in reserves. In reality, Kwon controlled both LFG and Terraform, misappropriating hundreds of millions of LFG’s assets and laundering them through concealed transactions.
- Mirror Misrepresentations: Kwon claimed that Mirror Protocol, an investment platform on the Terra blockchain, operated in a decentralized manner without Terraform’s involvement. However, he and Terraform secretly controlled Mirror, manipulated synthetic asset prices using trading bots, and inflated user metrics to mislead investors.
- Chai Misrepresentations: Kwon falsely claimed the Terra blockchain processed billions of dollars in transactions for the Korean payment app Chai, demonstrating “real-world” utility. In truth, Chai used traditional financial networks, not the Terra blockchain.
- Genesis Coin Misrepresentations: Kwon misused $145 million of Genesis Stablecoins, originally reserved for specific purposes, to fund fake Chai blockchain transactions and manipulate synthetic asset prices on Mirror using trading bots
At its peak in spring 2022, the combined market value of Terraform’s cryptocurrencies, UST and LUNA, exceeded $50 billion.
This growth was largely driven by Kwon’s false claims about Terraform and its technology, including secret efforts to manipulate the UST market in May 2021.
By May 2022, UST’s market capitalization was nine times larger, and its daily trading volume was more than eight times higher than in May 2021.
However, in May 2022, UST’s peg began to fail again, as it had the year before.
While Kwon managed to conceal the Terra Protocol’s flaws in 2021, he could not do so in 2022. This led to the collapse of UST and LUNA, resulting in over $40 billion in investor losses.
Following the crash, Kwon distributed a misleading “third-party audit” to cover up his actions and attempted to launder the proceeds of his fraud through various blockchains, cryptocurrency exchanges, and a Swiss bank account.
On March 23, 2023, Kwon was arrested in Europe for attempting to use a fraudulent passport to travel to a country without a U.S. extradition treaty. He was initially indicted in the Southern District of New York that same day.