The most indebted 32-year-old in the world?

Blick auf einen Teil Podgoricas, der Hauptstadt von Montenegro. Bild von Raymond Zoller via flickr.com, aufs Format fürs Blog zugeschnitten, Lizenz: Creative Commons BY-SA 2.0

A Sad Record: Do Kwon’s Terraform Labs, Creator of the Collapsed Cryptocurrency Terra (LUNA), is Sentenced to a Massive Fine – Possibly the Highest Penalty for Securities Fraud Ever.

There was a time when $4.4 billion could buy an entire country. Today, Mr. and Mrs. Kwo from South Korea can’t even erase the debts of their son Do Kwon’s company, who, after a tumultuous ride through the world of cryptocurrencies, has found himself stranded in Montenegro.

Late last week, Do Kwon’s company Terraform Labs reached a settlement with the U.S. Securities and Exchange Commission (SEC): Terraform Labs and Do Kwon agreed to a payment of $4.5 billion – and it looks like Do Kwon got off with a slap on the wrist, or to put it less euphemistically, he is still very much alive and free.

Do Kwon founded the cryptocurrency Terra (LUNA) with his company Terraform Labs. It included the algorithmically generated stablecoin UST, which collapsed in the fall of 2022. The collapse of the stablecoin and cryptocurrency wiped out around $40 billion in value and triggered a cascade of failures that culminated in the implosion of the FTX exchange. Of all the daring adventures that defined the long DeFi summer of 2021/22, Terra stood out as particularly bold. The SEC accused Do Kwon and his company, in the words of Director Gary Gensler, of „one of the largest securities frauds in U.S. history“ and filed a lawsuit.

After a warrant was issued for his arrest in South Korea, Do Kwon fled to the Balkans, attempting to reach Dubai with a forged passport. He was arrested at Podgorica Airport. A court sentenced him to four months in prison for document forgery. Although he is free after posting bail, he is still under restricted movement while awaiting a final verdict on his extradition. The country’s highest court has approved extradition to either South Korea or the United States, with the time and destination pending the Ministry of Justice’s decision.

In the U.S., he was found guilty of massive securities fraud. The agreed penalty now consists of $3.5 billion in restitution, over $460 million in interest, and $420 million as a civil penalty. Do Kwon has to pay only a portion of it himself, about $200 million. The rest is to be covered by Terraform Labs, which, according to bankruptcy filings, only has $150 million in assets left.

Another part of the penalty is that Do Kwon and Terraform Labs are no longer permitted to buy or sell cryptocurrencies and tokens, including those part of the Terra ecosystem or its remnants. The SEC is acting a bit like a scavenger here: they impose an absurdly unrealistic fine that exceeds what there is to distribute by many times, to ensure that the creditors they represent—presumably American investors—at least get what can be taken. The decree that forbids buying or selling assets indicates that Do Kwon and his company are effectively barred from repaying other creditors.

It would be interesting to see if Do Kwon can service his debts. It’s possible. The young man could possess hundreds of millions of dollars in cryptocurrencies on memory sticks, laptops, encrypted online wallets, or brain wallets; he could even, if he pays the fine and no further troubles arise from South Korea, board a plane towards Dubai as a free man with his own passport – potentially carrying hundreds of millions of dollars in his hand luggage, if the Terra disaster brought him ample profit.