Recently, a significant verdict was announced by a federal jury in New York, where South Korean cryptocurrency magnate Do Kwon and his company Terraform Labs were found to be involved in fraudulent activities. This ruling sheds light on justice for investors who witnessed the value of their investments in cryptocurrency plummet to almost zero.
The genesis of this civil lawsuit can be traced back to February 2023 when the U.S. Securities and Exchange Commission (SEC), the regulatory body responsible for protecting investors' rights, decisively stepped in and filed a civil lawsuit against Kwon and Terraform. The complaint detailed how the defendants meticulously orchestrated a fraudulent scheme, resulting in market losses of up to $40 billion. They spun a beautiful lie to investors, exaggerating the prospects and stability of the cryptocurrency tokens they issued, luring countless people into this financial whirlpool.
Following the market crash in 2022, Kwon took the path of fugitive. He faced not only criminal charges in the United States but also became a subject of pursuit by the South Korean police. The former cryptocurrency tycoon recently obtained bail from a prison in Montenegro - where he was arrested last year - and is now awaiting extradition.
In Kwon's absence, a federal jury in the Southern District of New York carefully listened to the testimony of investors who purchased Terraform tokens, whistleblowers from companies that collaborated with Terraform, and other key witnesses. After less than two hours of deliberation, the jury unanimously ruled that Kwon and Terraform were unequivocally responsible for making false statements and misleading investors in their civil fraudulent activities.
In a subsequent statement, Gurbir S. Grewal, Director of Enforcement at the SEC, said, "We are pleased with today's jury verdict, which firmly establishes the responsibility of Terraform Labs and Do Kwon for a massive cryptocurrency fraud. While cryptocurrency investments may seem enticing, full of promises, the lack of necessary regulatory measures has led to extremely serious consequences for real-world investors. We will continue to steadfastly uphold fairness, transparency, and order in the market, protecting the legitimate rights of investors."
Market analyst Noelle Acheson (formerly of cryptocurrency brokerage firm Genesis Trading) commented that the civil trial outcome for Kwon, along with the recent judgment against Sam Bankman-Fried, founder of the cryptocurrency exchange FTX, marks the end of a painful period for the cryptocurrency industry. Acheson remarked, "Many people are deeply saddened by Do Kwon's actions. Those investors feel betrayed." She further noted, "Hopefully, these events will remind people to do their homework before investing, ask more targeted questions, and avoid being misled by empty and unrealistic promises."
Kwon co-founded Terraform with Daniel Shin in 2018. In 2020, the company ambitiously announced the launch of a stablecoin called TerraUSD (UST), claiming its value would be pegged to the U.S. dollar, providing investors with a safe haven from the volatility of other cryptocurrency markets.
Stablecoins typically maintain their specific value by backing them with a basket of underlying assets such as cash and short-term government bonds, allowing investors to redeem them at any time. However, Terraform claimed that UST would adopt a unique mechanism, pegging it to another token issued by the company called LUNA, using complex algorithms to maintain its value relative to the U.S. dollar. If the value of UST deviated from $1, traders would theoretically be incentivized to buy or sell the stablecoin to restore its value to the target level.
In early 2022, UST and LUNA gained popularity, with LUNA even becoming one of the top 10 cryptocurrencies by market capitalization globally at one point, followed closely by UST. Acheson said, "This mechanism was both intriguing and novel, and many smart people at the time believed it could work."
In May 2022, a sudden storm swept through the cryptocurrency market. As large UST holders began selling the token in bulk, UST quickly deviated from its peg to the U.S. dollar, causing panic in the market and triggering a broader sell-off, with the price of UST plummeting almost to zero. At the same time, other tokens associated with LUNA and Terraform also suffered significant losses, with their market capitalizations shrinking drastically. Acheson commented, "The mechanism UST claimed to have built on a false assumption, that people expect it to self-correct, so it can self-correct." She further pointed out, "[Kwon] made unrealistic marketing claims about the stability of the stablecoin, misleading many investors."
This event not only plunged the cryptocurrency market into a downward spiral but also triggered a series of chain reactions. A number of cryptocurrency companies found themselves in trouble, with the hedge fund Three Arrows Capital being the hardest hit, declaring bankruptcy in June. Subsequently, cryptocurrency lending companies Voyager Digital, BlockFi, and Genesis also faced difficulties, indirectly impacting the stability of other major cryptocurrency companies such as FTX. This storm sent shivers through the entire cryptocurrency industry like never before.