Written by: TaxDAO
Do Kwon was once hailed as South Korea's 'King of Cryptocurrency.' However, with the collapse of UST and the ensuing legal charges, this name became associated with tax evasion and fraud. In May 2022, the South Korean National Tax Service issued a tax penalty of 100 billion Korean Won (approximately 78 million USD) to Do Kwon, the co-founder and CEO of Terraform Labs. As early as June 2021, Terraform Labs had already attracted the attention of South Korean tax authorities for suspected tax evasion. Since his arrest in Montenegro, Do Kwon has been waiting for a final extradition decision. FinTax will discuss this former cryptocurrency tycoon, the once-glorious Terraform Labs empire, and the substantial tax penalties that Do Kwon bears.
1. The Background of the Do Kwon Case
1.1 The Glory of Do Kwon and the Rise of Terraform Labs
Do Kwon was born in Seoul, South Korea, in 1991. He obtained his Bachelor's degree in Computer Science from Stanford University in 2015 and briefly worked as a software engineer at Microsoft and Apple. However, not long into his job, Do Kwon became disillusioned with the lack of 'ambition' in large companies and decided to start his own business. In January 2016, Kwon returned to South Korea to develop and decided to establish his startup, Anyfi. However, the success of Anyfi is not the story we are discussing today; a true crypto legend began when he started researching blockchain technology with his college friend Nicholas Platias and ultimately decided to found Terraform Labs. The vision of Terraform Labs was to create a new type of monetary system, specifically a decentralized stablecoin—Terra USD (UST). The birth of UST marked the rise of Do Kwon's Terra empire, but at the time of laying the foundation for the empire, Do Kwon harbored a simple idea: to create 'the most useful dollar possible.'
UST and LUNA are the core components of the Terra ecosystem. UST is an algorithmic stablecoin pegged to the value of the US dollar. When minting UST, users need to burn an equivalent amount of LUNA (i.e., 1:1 exchange); similarly, to redeem LUNA, users must burn the corresponding amount of UST. At this time, there is an arbitrage opportunity between LUNA and UST, where traders can burn and mint based on incentives when the price of UST or LUNA deviates from 1 US dollar, thereby ensuring the price stability of UST through price-supply-demand relationships. This also means that UST does not have external asset collateral support but relies on market supply and demand and incentive mechanisms to maintain its price stability. This is precisely the biggest difference between UST and Tether, USDC, or DAI: UST is not backed by fiat currency or on-chain assets.
1.2 The Collapse of UST and Do Kwon's Flight
In theory, the mechanisms between LUNA and UST should be able to respond to various market fluctuations, but reality is often more complex and brutal. In 2022, the collapse of the Terra ecosystem was precisely because this mechanism failed to effectively stabilize the price of UST amid market panic. As whales sold off UST, when the market supply of UST far exceeded demand, the price of UST began to decouple, but the system could not timely adjust the supply of LUNA, leading to a sharp decline in the price of LUNA, which resulted in an inability to buy back enough UST with LUNA to keep the latter pegged to the US dollar. Ultimately, LUNA and UST spiraled into a dual collapse, triggering a crash in the cryptocurrency market, with LUNA plummeting from its historical high of $119.51 to nearly zero, losing around $45 billion in market value within a week. In South Korea alone, approximately 200,000 investors suffered significant losses or even bankruptcy. This unexpected collapse not only destroyed the once-thriving UST but also left Do Kwon's empire teetering.
With the collapse of UST, Do Kwon began a 10-month life on the run. During this time, South Korean prosecutors issued an arrest warrant for him in September 2022, and Interpol also issued a red notice. On March 23, 2023, Montenegrin police detained Do Kwon at the airport for using forged documents. Upon learning of this news, federal prosecutors in New York quickly charged him with fraud, including conspiracy to commit fraud, commodity fraud, securities fraud, wire fraud, and conspiracy to manipulate the market. The U.S. Department of Justice subsequently requested Montenegro to extradite him to the U.S. In addition, South Korea and Singapore, which have legal jurisdiction, also submitted extradition requests. Currently, although the Montenegrin court has not made a final decision, the likelihood of Do Kwon facing trial in South Korea is the highest.
2. Tax Evasion Charges and Potential Legal Liabilities Faced by Do Kwon
In addition to fraud charges, Do Kwon and Terraform Labs also face substantial tax evasion allegations. In June 2021, the South Korean National Tax Service launched a special tax investigation into Terraform Labs' parent company, The Ancore Company, and Terraform Labs for suspected tax evasion. During the tax investigation, the South Korean National Tax Service discovered that Do Kwon held 92% of the shares in Terraform Labs’ Singapore entity, Terra Singapore. It was verified that this Singapore company secretly transferred a large amount of profits to the British Virgin Islands (BVI) to take advantage of BVI's lax tax policies. As the largest shareholder, Do Kwon was naturally the biggest beneficiary of this tax evasion. This tax avoidance strategy is not uncommon; Samsung Electronics Vice Chairman Lee Jae-Yong was summoned by the South Korean prosecutors in 2021 for establishing a shell company in the BVI to transfer profits, and such overseas tax evasion behaviors have always been a key target of the South Korean government.
The first step in determining tax evasion should be to clarify jurisdiction. In the Do Kwon case, although Do Kwon designed the corporate equity structure to transfer the vast majority of cryptocurrency profits to a BVI company, significantly reducing the actual tax burden, according to the actual business principles adopted by South Korea, the companies controlled by Do Kwon, although registered abroad, are essentially still conducting cryptocurrency business activities within South Korea. Therefore, they should pay relevant taxes in South Korea.
The criteria for determining tax evasion in South Korea are relatively close to commonly used standards in other countries. The first point is to determine whether there is tax evasion, which means either failing to report or underreporting income, property, or other taxable items; the second point is that the taxpayer knows they are reducing or evading tax payments and intends to do so, as tax evasion is generally not due to negligence, misunderstanding, or unintentional actions; the third point is reaching a certain monetary threshold. According to the details disclosed in the official case, Do Kwon was aware of the company's equity structure and tax arrangements. Although South Korea does not explicitly specify a monetary threshold for tax evasion, the amount of tax evasion by Do Kwon cannot be considered small. Therefore, if the South Korean prosecutors can present legal and sufficient factual evidence, it is almost certain that Do Kwon will be convicted of tax evasion, which means he will face a long imprisonment and be fined approximately 100 billion Korean Won. If the charges of financial fraud and other offenses are also substantiated, then Do Kwon will not only face bankruptcy but will also spend the most productive years of his life in prison.
3. Reflections on the Do Kwon Tax Evasion Case: From King of Cryptocurrency to Prisoner
In the world of cryptocurrency, the Do Kwon incident is like a bombshell, triggering profound reflections within the crypto industry on the regulation of cryptocurrency assets, especially tax compliance regulation. An increasingly prominent contradiction is that, on one hand, the cryptocurrency industry is vibrant, having grown geometrically through several bull and bear cycles, creating a wealth effect that is rare in human history; on the other hand, governments and regulatory agencies hold a set of relatively mature yet traditional regulatory rules, attempting to bring the cryptocurrency industry under their control. In the face of this emerging entity, the regulatory measures of various governments are certainly motivated by the need to maintain financial order and economic stability, but they may impede the normal development of the cryptocurrency asset industry. As Trump criticized former SEC Chairman Gary Gensler, the SEC's past strict regulatory measures may have continuously diminished the United States' competitiveness in the global cryptocurrency and blockchain arena. Perhaps for a nascent entity, the most effective assistance is to watch and wait, intervening cautiously.
From the perspective of tax administration, tax rules for cryptocurrency assets are not clear enough in various countries, and the endless innovations in the cryptocurrency field further complicate the applicability of relevant rules. This objectively increases the tax burden on the cryptocurrency industry, and a transparent and stable tax framework that aligns with the characteristics of the cryptocurrency industry is essential. In fact, Do Kwon has expressed dissatisfaction with the South Korean tax system, believing that he bears an excessive tax burden under South Korean tax law. In comparison, transferring profits and wealth to the BVI, known for its zero tax rate, is evidently a more economical choice. However, Do Kwon still overestimated his ability to avoid taxes and the investigation capabilities of tax authorities in various countries. In other words, regardless of whether UST collapsed, Do Kwon would inevitably be investigated for tax evasion; it was just that this collapse expedited the arrival of tax charges. In a sense, cryptocurrency assets for Do Kwon and countless other crypto millionaires are not just symbols of wealth and status but potential shackles. Once they decide to evade taxes or violate other regulatory requirements, these shackles can become real chains.
Even though the tax rules regarding cryptocurrency assets are not yet perfect, we still need to focus on current tax compliance issues before any changes occur in the tax rules to avoid unnecessary penalties and losses. To ensure trading compliance and avoid tax risks, investors in the cryptocurrency asset field should pay attention to:
First, improve internal tax management systems. For cryptocurrency enterprises, it is essential to establish a comprehensive, systematic, and rigorous tax management framework. From the issuance and distribution of tokens to the accounting of various business revenues and the monitoring of cross-border capital flows, every link must be included in the scope of tax compliance considerations. Through a complete internal management system and audit mechanisms, ensure the accuracy and completeness of tax information to effectively prevent potential tax risks.
Secondly, keenly observe policy dynamics and flexibly adjust strategies. The cryptocurrency asset industry is still in its early development stage, with frequent changes in tax policies and significant regional differences. Investors and businesses must closely monitor the policy dynamics of various countries and international organizations in the field of cryptocurrency asset taxation, keeping up with the latest regulatory changes and trends.
Thirdly, actively leverage professional expertise to enhance compliance levels. The tax issues surrounding cryptocurrency assets are highly specialized and complex, making it wise to seek collaboration with professional lawyers, accountants, or tax advisory teams familiar with cryptocurrency tax regulations. These professionals can provide accurate tax consulting services, develop personalized tax compliance plans based on the actual situation of enterprises or individuals, identify potential tax risk points in advance, and provide effective counter-strategies. Additionally, professional cryptocurrency tax declaration software can be utilized to assist, as this type of software can efficiently and accurately process large amounts of complex transaction data, greatly improving the efficiency and accuracy of tax declarations and effectively avoiding tax risks caused by human error.
