Do Kwon Maybe he
had a way with computers, but with his words…not
so much. CEO Do Kwon became known for the way he conducted himself in interviews. He said such
things like “I don’t argue with the poor” after receiving criticism on his cryptocurrencies.
British economist Frances Coppola criticized Kwon’s stablecoin model,
so Kwon responded by calling all of his critics quote “cockroaches.” When concerned investors
asked him on Twitter about the source of some of his capital yield reserves,
Kwon said, quote “your mom, obviously.” Kwon felt like he was on top of the world,
and didn’t need to impress the public in order to maintain his success.
Do Kwon is a South Korean cryptocurrency developer who cofounded and became the CEO
of Terraform Labs. The company, based in Singapore, created the Terra blockchain
and includes the currencies TerraUSD and Luna. Before he started his crypto career,
Kwon studied computer science at Stanford University and went on to work as an engineer
at both Apple and Microsoft. In September 2015, he moved back to South Korea. Some of his former
employees say that he founded a different currency called Basis, based on Ethereum. But the SEC had
some concerns with the currency, and it was shut down. But Kwon’s involvement was never confirmed.
What we do know, though, is that after Kwon worked with Apple and Microsoft,
he felt ready to start his own cryptocurrencies.
So, he founded Terraform Labs and established TerraUSD and Luna. He rode the wave of success
until it suddenly came crashing down. Now, he’s being called the South Korean Elizabeth Holmes.
Korean Musk But before he was
called the South Korean Elizabeth Holmes, he was the South Korean
Elon Musk. In April 2022, the price of Luna reached a whopping $119,
and became the first Korean currency to make it into the top ten crypto markets in the world.
TerraUSD was created as a stablecoin,
or a currency whose value is tied to that of another currency. Stablecoins are supposed
to provide alternatives to people who want to invest in crypto, but are afraid of the
rapidly changing markets. TerraUSD was supposed to maintain a one-to-one ratio with the U.S. dollar.
Kwon’s goal was to use his cryptocurrencies to establish a decentralized economy. His
confidence earned him the trust of high-profile investors including the venture capital firm
involved with Coinbase, one of the major platforms for cryptocurrency exchange.
Kwon was so confident in his currencies that he even named his daughter Luna,
after his “best invention.” He clearly had no idea that Luna’s
cash value would tank less than a year after his daughter was born.
Kwon also mentioned taking pleasure in watching companies fail. But he seemed to forecast his
own company’s failure when he said that 95% of crypto currencies are going to die.
Terra A few days later,
TerraUSD fell from its one to one U.S dollar ratio to 0.26 Terra USD to one U.S. dollar.
The crumbling crypto market urged investors to convert their TerraUSD to Kwon’s other coin,
Luna, which in turn fell 97% that day to a market value of nearly $0. It was a domino
effect of failure. Over the course of a week, the company lost almost $45 billion.
The reason why the Terra coins collapsed isn’t completely certain,
but some theories include mass withdrawals days before the collapse,
general investor concerns about cryptocurrencies, and a decline in the price of Bitcoin.
TerraUSD and Luna, once members of the world’s top ten largest crypto markets,
now held a value of next to nothing. This huge meltdown had a ripple
effect throughout the crypto universe, pushing the world’s largest stablecoin,
Tether, below its dollar peg and sending Bitcoin and Ether into 16-month lows.
Kwon tried to save his company by purchasing $3.5 billion of Bitcoin. The Luna Foundation
Guard announced that Kwon withdrew 37,000 bitcoins–a net worth of over $1 billion–to
lend out to his struggling investors. The rest of the money would be used to buy more TerraUSD
and increase the value of Kwon’s beloved invention. But instead of saving his investors,
it was like dumping water onto a sinking ship. Kwon wanted his cryptocurrency to be reset to an
inventory of 1 billion coins to be redistributed among investors. Other players in the field like
Billy Markus, co-founder of dogecoin, said that Kwon should leave the crypto industry altogether.
Many of Kwon’s unfortunate investors, who believed in his product as much as he did, lost their
entire life savings in the collapse of Terra. One person lost over $450,000. Another investor,
who claims to have lost more than $2 million, snuck into Kwon’s high rise condo to demand an
apology. He didn’t get one. But Kwon’s wife did file a request for emergency police protection.
The quick rise and fall of USD inspired people to compare Kwon
to the Theranos mastermind, Elizabeth Holmes.
Lawsuits After the crash of TerraUSD and Luna,
some people called it a Ponzi scheme similar to what happened to the Lehman Brothers before the
2008 recession. The United States Securities and Exchange Commission issued a subpoena to
Terraform Labs and Kwon in 2021, with a special interest in the company’s mirror protocol,
which claimed to be designed to mirror actual stocks. Kwon said he couldn’t comply with the
SEC’s demands and said that he would, instead, be suing the SEC. Despite his
attempts to countersue and avoid the SEC, a court hearing in February 2022 ruled in favor
of the governmental agency’s right to continue its investigation into Kwon and Terraform Labs.
Then, Kwon’s own country came after him. The South Korean Minister of Justices,
Han Dong-hoon, who sent the Economic Crimes Investigation Division of Seoul to track down and
seize the proceeds of criminal financial activity. On the first day of the operation, the Financial
and Securities Crimes Joint Investigation Team made Terra and Luna their first targets.
According to Korean investigators from the National Tax Service, Kwon’s company avoided
$100 million in taxes, and was ordered to pay it all back in December 2021. He refused to pay on
the grounds that Terraform Labs and Terraform Labs Virgin Islands aren’t Korean companies.
Nearly 200,000 people were affected by Luna’s downfall. Some Korean investors got together
to file a class-action lawsuit against Terraform Labs’ founders Kwon and Daniel Shin on criminal
charges. As of May 2022, more than 1,600 investors signed their names on the lawsuit. In June 2022,
Patterson v. Terraform labs was filed against Kwon and his associates in northern California.
15 people involved with Terra were placed under travel restrictions by the Korean government.
Kwon is believed to be hiding out in Singapore.
The hacktivist group Anonymous uploaded a video to
its Youtube channel pledging to bring Kwon to justice.
Both Korean and American governments cited the immense vulnerability and
lack of transparency in the crypto markets that led to the currencies’ sudden downfall.
This is especially for stablecoins, whose inherent value is tied to
non-digital currencies such as the American dollar, that change value during market stress.
Three Arrows Capital The effect of Do Kwon’s company
affected more than just independent investors. It affected hedge funds like Three Arrows Capital,
a Singaporean cryptocurrency hedge fund founded in 2012 by Kyle Davies and Su Zhu.
Davies and Zhu met at boarding school and both studied at Columbia University.
They founded 3AC in 2012 and almost immediately found huge success. The founders gained a large
social media following for their rapid success and crypto knowledge. 3AC put the majority of
its money in up-and-coming cryptocurrencies like TerraUSD, Luna and Ethereum. In February 2022,
3AC invested over $200 million in Luna tokens alone. At one point, the company claimed a net
asset value of $18 billion, including $10 billion of cryptocurrency assets.
But with Terraform Labs’ reputation under fire and Kwon’s reputation destroyed, 3AC didn’t
have a leg to stand on. After $400 million in liquidations in 2022, 3AC faced insolvency.
A short three months later, a court in the British Virgin Islands forced the company
to sell all of its crypto holdings in one of the largest hedge-fund
trading losses of all time. On July 1, 2022, 3AC filed for bankruptcy.
Su Zhu Zhu, cofounder, director, CEO,
and CIO of 3AC was living the high life while 3AC rode the wave of success. He used his earnings to
buy properties all over the world including 3 bungalows in Singapore from 2019 to 2021.
The total value of these properties amounted to a whopping $84 million. Zhu’s last purchase was
yet another bungalow, this time in the name of his 3-year-old son, for $50 million. He bought
another property overlooking Singapore’s beautiful Dalvey street for $29 million. Another property
purchased in June 2019 is a $6 million unit in a luxury building called the Goodwood Grand.
Zhu, together with 3AC, own 5 luxury properties,
3 bungalows, a business townhouse, a yacht, and a fleet of sports cars.
These purchases might look silly now considering the fate of 3AC. But at the time,
they weren’t bad decisions. Zhu had more than enough money to keep investing his fortune in
properties around the globe. And no one was going to stop him…except the crypto market.
Crashing Down In the first half of 2022,
cryptocurrencies experienced major decline. Most tokens lost over 50% of their original value.
After TerraUSD and Luna crashed to a value of near zero, 3AC owed debts nearing $3 billion.
In June 2022, 3AC was named in the class action lawsuit against Terraform Labs. Later that month,
3AC received a warning notice from the Monetary Authority of Singapore for falling
below its threshold of $250 million in assets, a condition that it needed to meet in 2013 in
order to register as a hedge fund. 3AC got in more trouble after giving false information to the MAS,
and failing to notify them about changes in leadership and shareholdings.
In June 2022, the news reported that 3AC didn’t meet its margins. One week later,
The Wall Street Journal reported that 3AC failed to repay money that was lent
by crypto broker Voyager Digital. Voyager Digital issued a default against 3AC for
failing to make the required payments on a Bitcoin and US Dollar loan worth more than
$665 billion. Voyager Digital sued 3AC and that same day, the high court in the
British Virgin Islands forced the company to liquidate. 3AC declared bankruptcy on July 1.
Yacht Life Unfortunately for founders
Su Zhu and Kyle Davies, this was very bad timing. Instead of paying creditors back, Zhu and Davies
just put a deposit down on a $50 million yacht. It weighed 500 tons and was 171 feet long with five
decks and a glass bottom pool. The captains showed off pictures of the boat at parties, bragging that
it would be the biggest yacht in Singapore, with plans to add projector screens for Davies and Zhu
to show off their growing NFT collection. It was the biggest boat ever sold in Asia. It was a huge
achievement for the crypto industry. But now we know that it was purchased with borrowed funds.
The domino effect of failure started with Terra Labs and didn’t end with 3AC. Voyager Digital
filed for Chapter 11 bankruptcy in New York City in July 2022, reporting that 3AC owed it more
than $650 million. Genesis Global Trading, with headquarters on Park Avenue, lent 3AC $2.3 billion
that it never saw repaid. And blockchain.com, a digital wallet and exchange company,
had $270 million in unpaid loans from 3AC and had to lay off a quarter of its staff. Many crypto
analysts observed that the liquidation of 3AC led to an even greater crypto crash that caused huge
currencies like bitcoin to plunge more than 70% in value, a decline of over one trillion dollars.
According to court papers, Davies and Zhu haven’t been cooperating with the liquidation process.
As of July 8, 2022, their whereabouts were unknown while 3AC still owes creditors over $3.5 billion.
The superyacht is now sitting, abandoned, on the Italian coast since Davies and Zhu
never made their final payment. It’s now back on the market.
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