The Current Investigations on Terraform Labs and founder Do Kwon Following LUNA/UST Crash

South Korean Police investigates Terraform Labs for fraud and laundering: On June 8th, Seoul Metropolitan Police announced that they have begun an official investigation on Terraform Labs and an employee who apparently had faked the amount of Bitcoin holdings the company had in its treasury. The investigation started after more than 100 investors in Seoul filed complaints that Terra faked information regarding its algorithmic balancing between LUNA and UST with false details on their treasury.

US SEC launches investigation on Do Kwon and Terraform Labs due to founder cashing out $80 million a month before the scandal: On June 10th 2022, the SEC officially revealed that they are investigating both Terraform Labs and its founder for not only fraud prior to the scandal but also for being aware of when and how the crash would happen. The investigation focuses on interrogatories performed on employees of Terraform Labs, the company founded by Do Kwon. According to these employees, Do Kwon started cashing out exactly $80 million dollars a month from the protocol’s treasury and his own funds - which then went to several different crypto wallets.

South Korean prosecutors specifically investigating Do Kwon for running a Ponzi scheme: Lawyers involved in the case suggest that Do Kwon and his partner Daniel Shin were fully aware that the system was unsustainable from the very beginning and used it to pool money from unaware retail investors.

Terraform Labs loses appeal against SEC and must provide information on Mirror Protocol: The reasoning behind the investigation claims that Terraform Labs made legal partnerships on US soil for advertisements related to Mirror Protocol, which would be illegal as the foundation is not registered in the United States. Therefore, Do Kwon and Terraform Labs must provide the supposed contracts of their involvement with American companies.

Keywords: investigations on terraform labs, terraform labs, founder do kwon, luna/ust crash, luna crashed, anchor protocol, mirror protocol, south korean prosecutors, US SEC, Do Kwon loses appeal, founder daniel shin, ponzi scheme

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On the second week of May 2022, following a series of programmatic errors and co-dependent structures in the protocol, the until-then major crypto player Terra (LUNA) crashed from being $86 dollars to becoming virtually worthless - in a matter of days.

Chaos ensued in the crypto markets and Terra’s community, as people try to come to grips with what had happened. Now, a month after the debacle, the controversy is far from over. The foundation responsible for the LUNA and UST projects, Terraform Labs, is under investigation by several agencies along with founder Do Kwon.

In this article, we detail the current investigations on Terraform Labs and Do Kwon’s involvement in them following the LUNA/UST crash.


South Korean Police investigates Terraform Labs for fraud and laundering

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Less than a week after LUNA and the UST stablecoin crashed, the South Korean government announced through its financial regulatory agency that they would be taking measures against Terraform Labs and possibly founder Do Kwon regarding the crash. The moment finally arrived, with the agency announcing that it’s officially taking measures to court - more specifically in Seoul, Kwon’s place of residence.

On June 8th, Seoul Metropolitan Police announced that they have begun an official investigation on Terraform Labs and an employee who apparently had faked the amount of Bitcoin holdings the company had in its treasury. The investigation started after more than 100 investors in Seoul filed complaints that Terra faked information regarding its algorithmic balancing between LUNA and UST with false details on their treasury - which was to be used as a backup source of funding in case UST lost its dollar peg.

Terra co-founder Daniel Shin denied the allegations, while Do Kwon has not commented on the matter yet. According to Daniel Shin reporting to the Financial Times, they “[...] were not aware of any flaws in the coins’ algorithm and there was no attempt at manipulating their prices.”

Since the start of this investigation, Seoul’s Southern District Office announced that it is also investigating Terraform Labs in a broader scope of fraud and money laundering. While only hundreds of complaints were officially registered with the policy, as mentioned, the Office estimates that at least 280 thousand South Korean citizens have been affected by the crash.


US SEC launches investigation on Do Kwon and Terraform Labs due to founder cashing out $80 million a month before the scandal

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Right after the LUNA/UST crash, the United States Securities and Exchange Commission (SEC) had already announced to representatives that they were looking into the issue and how to best approach the situation. On June 10th 2022, the SEC officially revealed that they are investigating both Terraform Labs and its founder for not only fraud prior to the scandal but also for being aware of when and how the crash would happen.

The investigation focuses on interrogatories performed on employees of Terraform Labs, the company founded by Do Kwon. According to these employees, Do Kwon started cashing out exactly $80 million dollars a month from the protocol’s treasury and his own funds - which then went to several different crypto wallets. These employees, and SEC, speculate that Do Kwon was very much aware of the fiasco that was about to come so he started taking some profits and assets from the organization’s treasury for himself.

Although many employees are stating that Do Kwon was aware of the crash months before it happened, there are also statements of those who believe Do Kwon to be innocent and that there were no procedures or official payments made from the company towards him or that there are any “tokens set for him.”

Regarding these allegations, Do Kwon tweeted that “There's a lot of misinformation and falsehood out there, and we [Terraform Labs] promise to do our part in making sure as much of it is correct as possible.”


South Korean prosecutors specifically investigating Do Kwon for running a Ponzi scheme

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Still on the South Korean side of the controversy, some prosecutors from the region are digging deeper into Do Kwon beyond awareness of the protocol’s flaws and eventual breakdown - they believe that Do Kwon was running a full-on Ponzi scheme. A Ponzi scheme is an illegal strategy where the leader of the scheme tries to get as many people as possible to invest in a particular product under the pretence of way-above-average gains. With enough people investing, the scheme is large enough to keep going indefinitely with the leader profiting while also paying those very few who wish to cash out.

Therefore, according to such prosecutors, the LUNA/UST pairing was not made to function at all. UST belongs to Anchor Protocol which promised a stablecoin APY of about 20% per year, something unheard of for any other passive income with stablecoins. Lawyers involved in the case, such as Kim Hyun-Kwon, suggest that Do Kwon and his partner Daniel Shin were fully aware that the system was unsustainable from the very beginning and used it to pool money from unaware retail investors.

This investigation gained more strength recently as an Anchor Protocol core developer came forward to claim that the Anchor team had warned Do Kwon about such an unsustainable structure but the Terraform Labs founder decided to ignore the warnings. “I thought it was going to collapse from the beginning (I designed it), but it collapsed 100%,” the developer said to a South Korean media outlet.


Terraform Labs loses appeal against SEC and must provide information on Mirror Protocol

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The most recent development on the case, updated on June 10th, was also related to an old case between the SEC and Terraform Labs. The Terraform foundation, along with founder Do Kwon, has lost their appeal to not provide legal documents on Mirror Protocol - one of many Terra projects such as LUNA and UST where users are able to buy synthetic versions of traditional stocks like Tesla and Apple.

The reasoning behind the investigation claims that Terraform Labs made legal partnerships on US soil for advertisements related to Mirror Protocol, which would be illegal as the foundation is not registered in the United States. Therefore, Do Kwon and Terraform Labs must provide the supposed contracts of their involvement with American companies.






Author: Gate.io Researcher: Victor Bastos
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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