Do Kwon speaks again: There is a difference between failure and fraud, confident in new Terra

Do Kwon used his rabid Twitter following to build a cryptocurrency empire that collapsed in the $40 billion crash last month. Despite investor anger, government investigations and a slump in the crypto market, the South Korean entrepreneur is now trying to make a comeback.

“I have full confidence in our ability to rebuild stronger than before,” Do Kwon told The Wall Street Journal.

Do Kwon supports the launch of a new version of Terra, the blockchain network behind the failed UST and Luna. UST is a so-called stablecoin designed to maintain its value at $1, but the token is now worth less than a cent. Its collapse sparked a more than 99% plunge in Luna, a cryptocurrency that backs UST pegged to the U.S. dollar.

The fallout from this internal meltdown hurt thousands of investors around the world, including many who deposited their savings with Anchor Protocol, a crypto bank that offers high yields on UST deposits. The crash was also a precursor to this month’s carnage in crypto markets: a brutal sell-off that caused lending platform Celsius Network to freeze all accounts worth billions of dollars.

Since the collapse of the UST, groups representing more than 90 people in South Korea have filed complaints against Do Kwon, accusing him of fraud and illegal fundraising. A spokesman for the Seoul Southern District Prosecutor’s Office confirmed it was investigating the Luna and UST cases, but declined to provide details. According to local media reports, an investor rang the doorbell at Do Kwon’s home in Seoul, prompting Do Kwon’s wife to seek police protection. The investor — an internet celebrity who broadcasts cryptocurrencies — later said on his live channel that he lost money on Luna and wanted to speak to Do Kwon in person.

Last week, the U.S. law firm representing Chicago investors who lost money in the UST crash filed a class-action lawsuit against Do Kwon, his company Terraform Labs and several others, alleging fraud and the sale of unregistered securities.

Terraform Labs said it would not comment on any active investigations. It said the lawsuit was baseless and said it intended to defend itself.

Do Kwon, 30, said: “I’ve been devastated by the recent events and I hope all the affected families can take care of themselves and their loved ones.”

Earlier this year, when Luna was trading near $100, analysts said Do Kwon was a billionaire based on the number of tokens he held. That may have been the case, says Do Kwon, although he “never really calculated” — and he lost nearly all of his net worth in the crash. “It doesn’t bother me,” he added, “I live a pretty frugal life.”

The new Terra blockchain launched in late May after a majority of Luna holders approved the move in a shareholder-style vote. The almost worthless old Luna was renamed “Luna Classic” and holders of UST and Luna Classic received a new token called Luna.

It hasn’t been smooth sailing so far: The new Luna started trading at $18.87 on May 28 before plummeting immediately, and most recently traded at $1.97, according to data provider CoinGecko.

“I don’t understand why anyone would want to invest in Luna 2 after seeing Luna 1 explode so violently,” said Mati Greenspan, founder of crypto research firm Quantum Economics.

Proponents of the re-release hope that developers will be able to build applications based on Terra technology to spark activity and bring value to the new Luna. “Many builders are restarting their applications on the new chain,” Do Kwon said.

The reboot could be the ultimate act of wanton Do Kwon, a man with a divisive following in the crypto community. His admirers call himself a “crazy,” while his critics see him as a snake oil salesman.

“I feel very sad about Do Kwon because his name is now being dragged into the mud,” said Ronald AngSiy, an executive at Intellabridge Technology Corp., which allows people to earn interest on cash deposits by investing in cryptocurrencies.

Mr. AngSiy interacts with Do Kwon at business meetings and acts as Terra’s ambassador. He said he lost more than $1 million of his personal investment in the Luna crash, but maintained a high opinion of Do Kwon. “On Twitter, he can act like a megalomaniac, but he doesn’t,” he said.

Others in the crypto community say that Do Kwon ran a sophisticated scam. Cory Klippsten, CEO of cryptocurrency firm Swan Bitcoin, said: “It’s pretty clear from how this guy tweeted, how he spoke on camera, and how he presented himself as a fraudster.”

Do Kwon denied Klippsten’s account. He noted that big names in the crypto industry share Do Kwon’s belief in the future of UST, and that he personally lost money in the crash. “I made confident bets and made a confident statement on behalf of UST because I believed in its resilience and value proposition,” he said, ” I’ve lost those bets, but my actions are 100% in line with what I’ve said. Words. There is a difference between failure and fraud. ”

Since its inception, Terraform Labs has raised more than $200 million in funding from investors including Coinbase Ventures and Mike Novogratz’s Galaxy Digital Holdings Ltd., according to PitchBook. Coinbase said its investment in Terraform Labs is small, and it has no direct investment in UST or Luna.

Do Kwon attended a prestigious foreign language high school in Seoul, where he excelled in English debating and participated in the World School Debating Championship with the Korean team for three consecutive years. People who knew him as a teenager described him as charismatic and liked to say controversial things that angered classmates.

He graduated from Stanford University in 2016 with a degree in Computer Science. After working at Microsoft and Apple and founding an unsuccessful web startup, Anyfi, he turned to cryptocurrencies.

Do Kwon founded Terraform Labs in 2018 with Daniel Shin, a respected figure in the Korean startup scene, to develop the Terra blockchain. Daniel Shin declined to comment for this article.

According to a 2019 white paper co-authored by Do Kwon, the vision for the project is to create a series of Terra stablecoins pegged to the U.S. dollar, South Korean won, and other traditional currencies. The idea is that people can use these tokens — called TerraUSD, TerraKRW, etc. — in everyday transactions. Unlike major stablecoins such as USDC, the Terra stablecoin is not backed by real dollars or investments, but uses financial engineering to maintain price stability. Do Kwon argues that such a design makes it harder for governments to control transactions. He adopted the motto: “A decentralized economy requires decentralized money.”

Kwon has often cited South Korean payments app Chai’s use of its stablecoin as an example to differentiate Terra from rival crypto projects. Chai was launched in 2018 by Chai Corp., a startup founded by his partner Daniel Shin. The app originally used Terra to process payments, and blockchain technology is rarely used in the real world. As Chai gradually serves millions of users, Do Kwon’s comments reinforce the impression that the Terra stablecoin has a stable user base that can act as a stabilizing force during market volatility.

But according to a review of his past comments, Do Kwon has repeatedly exaggerated the connection between his blockchain project and Chai.

A spokesman for Chai said Do Kwon and Daniel Shin parted ways in March 2020. By 2021, Chai will no longer use Terra’s blockchain technology or digital assets to process its payments or store its assets, the spokesperson said. According to the spokesperson, Chai and Terra have only maintained their marketing partnership from May 2021 to March 2022.

Still, Do Kwon told an interviewer in April 2021 that 2.6 million South Koreans are using the Terra stablecoin for payments. As recently as March of this year, he mentioned Chai’s use of the Terra stablecoin on a podcast.

Terraform Labs and Do Kwon say they have always strived to be truthful when describing Terra and Chai. They said Do Kwon’s comments were correct because of a partnership with Chai that allows users of the app to convert Terra’s won stablecoin into “Chai assets” for payments. A Chai spokesperson said the feature was adopted as part of a partnership in May 2021, but its scope was scaled back four months later due to sluggish demand. Today, all of Chai’s services are unrelated to Terra, the spokesperson said.

Several members of the Terra team resigned in 2020 over concerns about the direction Do Kwon was taking on the project, the people said. One of their concerns is Do Kwon’s insistence on setting a fixed rate of return on deposits in Anchor Protocol to lure users to UST, the people said. Team members said Do Kwon’s approach was unsustainable and urged a variable rate of return in response to market conditions.

When Anchor went live in March 2021, its yield was set at around 20%, a high rate that attracted billions of dollars in investor capital before the UST crash. Terraform Labs declined to comment on the former employee, but noted that Anchor began moving away from fixed income earlier this year.

Another concern that led team members to leave was Do Kwon’s push to launch Mirror Protocol, which they believe violated U.S. securities laws, the people said. Mirror Protocol is essentially a pseudo-stock market, and its cryptocurrency tracks the prices of U.S. stocks like Apple and Tesla.

The project made Do Kwon a target of the U.S. Securities and Exchange Commission, which began investigating Mirror Protocol last year. In September, the SEC subpoenaed him at a crypto conference in New York. A month later, he sued the SEC to prevent the agency from enforcing the subpoena. In February, a judge ruled against Do Kwon, who lost an appeal earlier this month.

Terraform Labs said it has been following the procedures and relevant court orders. It said Mirror Protoco is not a market or exchange as defined by US law. An SEC spokesman declined to comment.

As UST has grown in size, critics including academics, crypto fund managers and rivals of Do Kwon have warned that it could easily collapse. They point out that similar algorithmic stablecoins have failed in a so-called death spiral after the mechanism that pegged them to the U.S. dollar collapsed.

Do Kwon dismissed such criticism on Twitter. In March, he called those who said UST could lose the peg as “idiots.” Last year, after British financial blogger and crypto skeptic Frances Coppola expressed concerns about bank runs on crypto lending platforms, Do Kwon tweeted: “I don’t debate poor people on twitter, sorry, I Nothing has changed for her now.”

“He was rude to me,” Ms Coppola said. When asked about the tweets, Do Kwon told The Wall Street Journal: “Do I regret some of the things I’ve said in the past? Yes.”

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