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Terra's Do Kwon Investigated for Running a Ponzi: Report

South Korean prosecutors are reportedly weighing whether they could make a Ponzi scheme fraud case against Do Kwon.

Terra's Do Kwon Investigated for Running a Ponzi: Report
Shutterstock cover by estar 2020 (edited by Mariia Kozyr)

Key Takeaways

  • Adding to criminal complaints from a group of South Korean investors, prosecutors are reportedly investigating Terraform Labs CEO Do Kwon on Ponzi charges.
  • The prosecutors are scrutinizing whether Terraform Labs' Anchor Protocol, which promised investors fixed 20% interest on UST deposits, was a Ponzi scheme.
  • The investigation follows Terra's $40 billion collapse last week.

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South Korean prosecutors are reportedly weighing whether they could charge Do Kwon for running a Ponzi scheme by promising unsustainably high fixed interest rates on UST  deposits via Anchor Protocol.

Prosecutors Investigating Do Kwon on Ponzi Charges

Do Kwon could be criminally charged for running a Ponzi scheme, South Korean news sources have reported. 

According to a Friday report from Yonhap, South Korean prosecutors are actively investigating whether they could make additional Ponzi scheme charges against Terraform Labs CEO Do Kwon, adding to the complaints already filed against the entrepreneur over Terra’s dramatic implosion. A Ponzi scheme is a type of investment fraud in which early investors profit from money gathered from new investors.

As Crypto Briefing reported, a group of South Korean investors filed a criminal complaint against Kwon and his co-founder Daniel Shin for fraud and other financial violations Thursday over Terra’s collapse. Per the latest report from Yonhap, the Seoul Southern District Prosecutors Office in charge of the case has reportedly assigned its Financial and Securities Crime Joint Investigation Team, dubbed the “Angels of Death,” to investigate whether Kwon was running a Ponzi scheme by promoting unsustainably stable yields on UST deposits via Anchor Protocol.

Today, Kim Hyun-Kwon, a partner at LKB & Partners, a top South Korean law firm representing the investors suing Kwon, told Yonhap that Anchor protocol was “unsustainable” and could be deemed a Ponzi scheme. “After reviewing the relevant laws, we have judged that the [Anchor] protocol can be established as a Ponzi scheme,” he said. “While there may be no legal clause on stablecoins and bitcoins, there is a judicial precedent we believe can be applied to this case.”

Yonhap also reported that an official from the prosecutors’ office said that “Kwon’s remarks promising returns could provide a key clue” for the case. 

Anchor Protocol is a Terra-native decentralized application built by Terraform Labs that sought to provide a fixed 20% interest rate on UST deposits. It was designed to achieve this by diverting the yield from the interest-bearing collateral posted by borrowers toward the UST depositors or lenders. 

However, when the hype around the crypto market began settling in late 2021 and cryptocurrency prices started trending lower, Anchor’s fixed 20% interest became unsustainable. Instead of lowering the protocol’s yield rate, Terraform Labs kept the rate high by propping up Anchor’s UST reserves with $450 million from its own treasury—money that prosecutors could argue came indirectly from LUNA investors.

According to local reports, Kwon has already left and moved most of his liquid assets out of South Korea.

Disclaimer: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.

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