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Off, US vs. China,

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Find Face Off wherever you get

1:01

your podcasts. Cryptomagnate

1:07

Do Kuan found liable for

1:10

multi-billion dollar fraud. When

1:12

Do Kuan's crypto empire fell to pieces,

1:15

tens of billions of dollars were wiped

1:17

out. A civil jury in

1:19

the US has found he lied to investors.

1:22

By Joel Kalili A

1:25

federal jury in New York has found

1:27

South Korean crypto magnate Do Kuan and

1:30

his company Terraform Labs liable

1:32

for defrauding investors who collectively sank

1:34

billions of dollars into crypto assets

1:36

whose value later fell to near

1:39

zero. Filed

1:41

in February 2023 by the Securities

1:43

and Exchange Commission, a regulatory body

1:45

responsible for protecting US investors, the

1:48

civil complaint alleged that Kuan and Terraform

1:50

had perpetrated a fraudulent scheme that led

1:53

to the loss of $40 billion of

1:55

market value, whereby they lied to investors

1:57

about the prospects and stole their assets.

2:00

The ability of the crypto tokens they

2:02

issued. Kwan. Who

2:04

went into hiding after the tokens crashed in?

2:06

Twenty Twenty Two. Is facing criminal

2:08

charges in the United States and South

2:10

Korea. He. Was recently released

2:12

on bail from a prison in Montenegro

2:14

where he was arrested last year and

2:17

weights extradition. In Quanta

2:19

absence, the jury in the Us.

2:21

Civil Trial in the Southern District

2:23

of New York heard evidence from

2:26

investors who bought into Terraform tokens,

2:28

whistleblowers from companies with which Terraform

2:30

partnered and other witnesses. After a

2:32

deliberation lasting less than two hours,

2:35

the jury found Quan and Terraform

2:37

liable on civil fraud charges related

2:39

to making false claims and misleading

2:41

investors entire forms, crypto token, We.

2:44

Are pleased with today's jury verdict holding

2:46

Terraform Labs and Oh Kwan liable for

2:48

a massive crypto fraud. Said. As

2:50

he see Division of Enforcement Director Grub your as

2:52

grew up in a statement. For. All

2:55

Crypto promises. The lack of registration

2:57

and compliance have very real consequences

2:59

for people. The. Resolution

3:01

of Kwan civil trial along with

3:03

the recent sentencing of Sandbank been

3:05

freed founder of Fallen Crypto Exchange

3:08

of Tx Will help to draw

3:10

a line under a traumatic period

3:12

for the crypto industry says market

3:14

analyst know well. Addison, formerly of

3:16

Crypto brokerage, Genesis Trading. Many.

3:18

Feel hurt by what doe Kwan did

3:20

those that invested feel betrayed she says.

3:23

Hopefully. People will be reminded to

3:25

do more homework and ask better questions

3:27

to avoid getting drawn into rather flimsy

3:29

claims Again, Kwan. Started

3:32

Terraform and Twenty Eighteen alongside

3:34

cofounder Daniel Shin. And

3:36

Twenty Twenty. The company announced plans to

3:38

launch a stable coin called Terry U

3:40

S D or U S T whose

3:43

value would remain pegged to the Us

3:45

Dollar, ostensibly providing holders with a refuge

3:47

from the volatility of other crypto assets.

3:50

Stable. coins are typically held to a

3:52

specific value by an underlying basket of

3:54

assets including cash and short term government

3:56

bonds for which they can be redeemed

3:59

at any time coin, but UST, claimed

4:01

terraform, would be pegged to its dollar

4:03

value by way of a complex algorithm,

4:05

tying it to a second coin issued

4:08

by the firm known as Loona. If

4:11

the value of UST were ever

4:13

to diverge from one dollar, traders

4:15

would theoretically be incentivized to either

4:17

buy or sell the stablecoin until

4:20

the target value was restored. At

4:23

the height of its popularity in early 2022, Loona

4:25

was among the 10 largest cryptocurrencies

4:27

in the world by the combined

4:29

value of coins in circulation and

4:31

UST wasn't far behind. It

4:34

was an intriguing and very novel mechanism,

4:36

says Acheson. Many smart people believed it

4:38

would work. In May 2022 it

4:40

all went wrong. When holders

4:42

of large amounts of USTs sold the token

4:45

in bulk, it slipped from

4:47

its dollar peg, leading to panic and

4:49

a broader sell-off that drove the price

4:51

practically to zero. Loona

4:54

and terraform's other coins were decimated along

4:56

with it. The mechanism

4:58

was based on the faulty assumption that

5:00

people would want it to self-correct and

5:02

therefore it would, says Acheson. Kwan

5:05

made marketing claims about the stability of

5:07

stablecoins that weren't true. The

5:09

incident sent crypto markets into a downward

5:11

spiral and catalyzed a chain reaction that

5:13

brought a string of crypto companies to

5:16

their knees. The

5:18

failure of terraform's tokens contributed to

5:20

the collapse of hedge fund 3

5:22

Arrows Capital in June, followed by

5:24

crypto lenders Voyager Digital, then BlockFi,

5:26

then Genesis and in a

5:29

roundabout way, FTX2. After

5:32

the incident, Kwan fled Singapore where terraform

5:34

was headquartered for Dubai and then Serbia.

5:37

He was later apprehended by authorities in Montenegro

5:39

where he was sentenced to four months in

5:41

prison for attempting to leave the country on

5:44

a fake Costa Rican passport. The

5:46

kind of hubris displayed by Kwan, says

5:48

Acheson, has been part of the crypto

5:50

ecosystem for some time. The

5:53

SEC's case was built around two core

5:55

allegations, first that Kwan and terraform had

5:57

misled investors about the capacity of the

5:59

company. for USD to restore itself to

6:02

a dollar valuation, to self-heal,

6:04

without intervention, and

6:06

second, that they had lied

6:08

about CHI, a large Korean payments firm

6:10

founded by Shin, utilizing terraform

6:12

technology to conduct its operations,

6:14

leaving investors with an unmerited

6:16

confidence in the prospect of

6:18

widespread adoption. In

6:21

May 2021, after USD had fallen from

6:23

its peg for the first time, the

6:25

SEC alleged, Kwon struck a secret deal

6:27

with trading firm Jump Trading, which agreed

6:30

to purchase the token in large volumes

6:32

until its value was restored to the

6:34

target level. At trial,

6:36

a whistleblower who had worked as a

6:38

software developer at Jump Trading testified to

6:40

that effect. Also,

6:42

as soon as Jump intervened to

6:44

manually restore USD to its dollar

6:47

valuation, the SEC claimed Kwon and

6:49

terraform began to make misleading public

6:51

statements, telling people the token automatically

6:53

self-heals by design. A

6:56

second SEC whistleblower, a former CHI

6:58

executive, testified that the payments company

7:01

did not process or settle transactions

7:03

using terraform technology, as Kwon had

7:05

claimed. Instead, the SEC

7:08

alleged terraform had artificially mirrored

7:10

CHI transactions on its network

7:12

to create the impression of

7:14

legitimate traffic. It presented

7:16

to the court messages between the two

7:18

terraform co-founders in which Kwon suggested they

7:20

create fake transactions that look real and

7:23

promised to try my best to make it

7:25

indiscernible. Both strands

7:28

of the SEC's case were extremely strong,

7:30

says Daniel Silva, a former U.S. prosecutor

7:32

and attorney at law firm Bacalter. It's

7:35

easy when you have people lying. Fraud

7:37

is a fancy word, but really it's just

7:39

lying to gain property, and everyone

7:41

understands lying is wrong, or at least that it

7:43

can get you in trouble. The

7:46

defense attempted to draw a distinction between

7:48

the failure of terraform's crypto assets, whose

7:51

risk profile it implied was well understood

7:53

by investors and the acts of fraud

7:55

alleged by the SEC. Failure

7:58

doesn't equal fraud, David Patton. Attorney

8:00

Taquan reportedly told the courtroom in his

8:02

opening statement. The defense

8:05

also sought to undermine the credibility of

8:07

the SEC whistleblowers, whom it reportedly suggested

8:09

were in it only for the financial

8:11

reward. The defense dismissed the

8:13

account of the former jump employee

8:16

as hearsay and cast the CHI

8:18

whistleblower as a disgruntled former staffer.

8:21

The defense also contended that CHI had

8:23

utilized the Terraform blockchain and argued that

8:25

the SEC could not prove otherwise without

8:27

access to the CHI source code. The

8:30

messages between Shin and Taquan about

8:32

fake transactions, Taquan's lawyers claimed, related

8:35

to a different project entirely. The

8:38

jury was ultimately unconvinced. Having

8:40

been found liable, Taquan and Terraform will be

8:43

dealt a financial penalty, the size of which

8:45

will be confirmed by the judge at a

8:47

later stage. They'll likely be

8:49

prevented from participating in the U.S. securities market

8:51

in the future, but the implications

8:53

of the case spill further afield. Before

8:56

the trial, the defense had called

8:58

for dismissal on the grounds that

9:01

the SEC had misclassified USD, LUNA

9:03

and other Terraform tokens as securities,

9:05

a specific class of financial instruments

9:07

from which investors expect to profit,

9:09

and therefore, lacked jurisdiction. The

9:12

debate over the appropriate classification of

9:14

crypto is central to multiple ongoing

9:17

legal disputes in the U.S. between

9:19

the SEC and Ripple, Coinbase and

9:22

other firms. The

9:24

crypto industry has repeatedly accused

9:26

the SEC of regulation by

9:28

enforcement, of wielding legal action

9:30

instead of articulating clear rules for

9:32

the road and making a jurisdictional

9:34

land grab. However,

9:36

in an opinion issued before the trial,

9:38

Judge Jed Rakoff, who presided over the

9:41

CHI case in New York, rejected the

9:43

arguments for dismissal. The

9:45

SEC should be allowed to resolve new

9:47

and difficult questions posed by emerging technologies

9:49

where the technologies impact markets that on

9:52

their face appear to resemble securities markets,

9:54

he ruled. The opinion

9:56

does not establish a rule that other U.S.

9:58

judges are duty-bound to fight. follow, but

10:00

in combination with the verdict in

10:02

favor of the SEC, sets a

10:04

precedent of sorts for a crypto

10:06

organization having violated U.S. securities laws.

10:10

�This case is before a well-respected judge

10:12

who is thorough and careful. He's

10:14

influential,� says Lisa Braganza, attorney at

10:16

Braganza Law and former branch chief

10:18

at the SEC. �A

10:20

decision from him will be cited over and

10:22

over again by fellow judges.� Terraform

10:25

had already signaled prior to the

10:28

trial its intention to appeal an

10:30

unfavorable verdict, citing the ambiguity over

10:32

the proper classification of its tokens.

10:35

The absence of Kwan from the courtroom,

10:37

which denied him the ability to sit

10:39

at the council table, hear the testimony

10:41

of witnesses and respond, says Braganza, could

10:44

support the appeal bid. In

10:46

the absence of legislative direction from the

10:48

U.S. Congress, Silva says the classification question

10:51

will be settled only when a crypto

10:53

case moves through the appellate courts, perhaps

10:55

arriving eventually at the U.S. Supreme Court.

10:59

�It's an evolving area of law,� he

11:01

says. �It's crystallizing with each case that

11:03

comes down. It just hasn't crystallized

11:05

yet.� From 4,500

11:07

miles away in Montenegro, Kwan

11:09

will have played his part. Thanks

11:12

for listening to Wired. My name is Zeke Robison

11:14

and for more stories like this one, visit

11:16

us at wired.com. Spoken

11:23

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