In the fast-paced volatile world of cryptocurrency, fortunes can be made and lost in an instant. One such cautionary tale is that of Terraforms Labs and its founder, Do Kwon. In May 2022, the company's dramatic downfall sent shockwaves throughout the industry, leaving investors reeling and raising important questions about the risks and complexities of the cryptocurrency market.

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From the promise of decentralized finance to the perils of unregulated markets, we'll examine the factors that contributed to Do Kwon's downfall and what it means for the future of cryptocurrency.

Do Kwon, the founder of the now-defunct cryptocurrency giant Terraform Labs, was arrested in Montenegro just a year after his multi-billion dollar venture imploded. Kwon and an associate were taken into custody on charges of possessing falsified government documents, marking a stunning fall from grace for the once-high-flying entrepreneur.

Billions Lost, Billions Paid: Terraform Labs' $4.47 Billion SEC Settlement

In a recent announcement, the SEC imposed a $4.5 billion penalty on Do Kwon and his disgraced Terraform Labs after being found liable by a jury for defrauding cryptocurrency investors who lost an estimated $40 billion when the TerraUSD and Luna token collapsed in 2022. The $4.5 billion penalty is a significantly reduced amount compared to the initial $5.3 billion sought by the federal regulator just months prior in April 2024.

Coldly, Kwon's legal team boldly contested the SEC's initial demand, and argued that Kwon should only face a maximum penalty of $1 million despite causing the catastrophic loss of $40 billion in the crypto market. This bizzare act for appeal was ultimately rejected for obvious reasons.

Now, Terraform Labs and Kwon have reached a settlement with the SEC, agreeing to pay a staggering $4.5 billion in disgorgement and civil penalties. But that's not all - the settlement also permanently bars Kwon and Terraform Labs from participating into the crypto market, effectively shutting down the entire Terra ecosystem.

Additionally, Kwon is prohibited from serving as an officer or director of any issuer with registered securities or reporting obligations. He is also required to pay at least $204,320,196 out of his own pocket.

However, many predict that much of the penalty is unlikely to be paid because Terraform filed for bankruptcy earlier in January. Instead, the $4.5 billion settlement will be treated as an unsecured claim, meaning, it will be prioritized last in the liquidation process, making it uncertain whether the SEC will receive any significant payment.

During the trial, Terraform Labs' current CEO Chris Amani revealed in court that the company's assets had dwindled to a mere $150 million, amidst ongoing bankruptcy proceedings. Meanwhile, Kwon's legal team argued that their client had no more illicit profits to surrender.

The Visionary

Do Kwon, 31, whose full name is Kwon Do-hyung, was born in South Korea and graduated from Daewon Foreign Language High School in the capital city, Seoul. It is one of the country's most prestigious private schools, with alumni such as Lee Boo-jin, the 52–year-old eldest daughter of former Samsung Group chairman Lee Kun-hee.

In 2015, Kwon completed his bachelor's degree in computer science at California's Stanford University, regarded as the most selective of all U.S. colleges with a 5% acceptance rate, similar to Harvard University. It also boasts the most winners of the Turing Award, known as the Nobel Prize of computer science.

Kwon reportedly spent three months in a software engineer internship at Apple Inc. In 2012 during his studies and then another three months at Microsoft Corp. in 2015 after graduating from Stanford.

It is not clear if Kwon was offered a job at the companies, but in January 2016 he founded a peer-to-peer telecommunications company known as Anyfi Inc., according to his LinkedIn profile. He was also working on a cryptocurrency white paper with college classmate Nicholas Platias, who later became head of research at Terraform Labs.

At some point, Kwon formed a partnership with established South Korean entrepreneur Daniel Shin, 39, who would become a co-founder with Kwon of Terraform Labs.

Just one month before his cryptocurrency empire came crashing down, Do Kwon proudly announced the birth of his daughter, Luna - a namesake of his most iconic creation. "My dearest creation named after my greatest invention," he declared, unaware that his world was about to come tumbling down.

Terraform Labs

Do Kwon possess a remarkable talent for persuasion. Most notably, he sold his vision of a new kind of payment system that would upend the status quo and replace the world’s currencies.

Terraform Labs was founded in 2018 in South Korea by Kwon and Shin and in April 2019, the company released the TerraUSD (UST) stablecoin and the sister Luna cryptocurrency.

• Terra (UST): A stablecoin pegged to the US dollar, designed to reduce price volatility
• Luna (LUNA): A governance token used to vote on platform decisions and earn rewards.

The Terraform Labs platform allowed users to make transactions with low fees, earn interest on their deposits and use decentralized applications (dApps).

The company gained popularity due to its innovative approach and rapid growth. Its coins, UST and LUNA, saw significant increases in value attracting many investors, which was how Do Kwon's net worth soared to billions.

However, it all came crashing down in May 2022, when the platform algorithm failed, causing UST to lose its peg to the US dollar, triggering a death spiral that wiped out $40 billion in investor funds, 99% of the coins' value and naturally, Do Kwon's entire fortune. The collapse was so catastrophic that it sparked a global cryptocurrency market meltdown, led to widespread investor suicides and prompted governments including SEC to issue warnings and tighten regulations.

Kwon fled from South Korea to Singapore6 in September 2022, just before the collapse of Terra and Luna. Singapore was Terraform Labs' legal base, as well as his residence when he fled South Korea. Despite the case, Singaporean authorities cooperated with the South Korean authorities in the investigation and manhunt for Kwon.

He successfully evaded authorities for months by hiding out in various locations including Dubai, Serbia and Montenegro, followed by a failed attempt to flee from Podgorica to Dubai on a jet with a fake passport.

During his time in hiding, Kwon was active on social media and communicated through various channels including Twitter and Telegram. He posted updates and statements, maintaining his innocence and criticizing the legal proceedings against him. Kwon consistently denies all accusations pinned against him, claims that he was not "on the run" and was in "full cooperation" with government agencies, despite not showing up for any of the hearings during his hiding.

Kwon has since been held captive in the Balkan country as he awaits his fate. A fierce tug-of-war has also since ensued between the United States and South Korea, each seeking to extradite him to face justice for his massive crypto fraud scheme.

• September 2022: Do Kwon left South Korea for Singapore, where Terraform Labs was based and as prosecutors in Seoul sought his arrest.
• December 2022: South Korean authorities believed he was in Serbia, and Kwon denied that he was in hiding but did not reveal his whereabouts.
• March 2023: Kwon was arrested at Podgorica Airport in Montenegro as he tried to board a flight to Dubai, and he was found carrying falsified documents.
• June 2023: Kwon was sentenced to four months in jail in Montenegro
• February 2024: Former executive of Terraform Labs, Han Chang-joon, was extradited to South Korea.
• March 2024: A Montenegrin high court approved Kwon's extradition to South Korea to face criminal charges related to the collapse of Terraform Labs.

The Terra Trap

On 17 June 2024, South Korean prosecutors uncovered a damning text exchange between Do Kwon and former Chai CEO, Hyun-seong Shin, revealing a suggestive sinister plot to defraud investors from the very beginning. The Chai is a payment app, which Terraform used to process millions of transactions for Korean consumers.

The incriminating messages, dating back to May 2019, expose Kwon's bold proposal to fabricate fake transactions, deceiving investors into believing the Chai app's success. Shin's chilling response? "Let's test it on a small scale and see what happens."

The text exchange was presented as evidence in court, with the prosecutors arguing that this conversation demonstrate that Kwon and Shin orchestrated this deliberate scheme to swindle investors from the beginning. However, Shin and his co-defendants vehemently deny any fraudulent intent, shifting the blame to Kwon's alleged mismanagement and external attacks for the catastrophic collapse of Terra and Luna.

Justice Denied: Settlement Funds Fails to Reach Victims

In a scathing rebuke, Coinbase's Chief Legal Officer Paul Grewal has denounced the SEC's settlement with Do Kwon and Terraform Labs as a "cosmetic" gesture that fails to deliver justice to the victims of the $40 billion crypto fraud.

On X, Grewal critiqued the SEC's approach to the case, calling the required asset relinquishment of $7 million "grossly inadequate". He argues that this amount is a mere fraction of the billions lost by investors, making the settlement a "drop in the ocean".

The criticism doesn't just stop there. It's growing louder as more prominent figures in the cryptocurrency industry are joining forces to express their discontent with the SEC's settlement with Do Kwon. They're calling it "lenient" and "inadequate", echoing Grewal's sentiments.