FBI and New York authorities probe collapse of TerraUSD

Founder of Terraform Labs, Do Hyeong Kwon, is reportedly the focus of a U.S. Department of Justice investigation, with the company’s former team members being questioned.

The Federal Bureau of Investigation (FBI) and Southern District of New York (SDNY) prosecutors are probing the collapse of TerraUSD stablecoin in May 2022, suggesting criminal charges could be on the cards for the stablecoin’s creator, Do Kwon, according to a report in the Wall Street Journal.

Citing “people familiar with the matter,” the report indicated that Department of Justice (DOJ) officials have met in recent weeks with former employees of Singapore-based Terraform Labs, Kwon’s company, as part of an investigation into the TerraUSD crash.

SEC taking the lead

This latest update in the Terra drama comes a month after the U.S. Securities and Exchange Commission (SEC) announced it was pursuing charges against Kwon and Terraform Labs.

The charges concerned TerraUSD (an algorithmic stablecoin), digital asset LUNA, and digital asset security token MIR, with the SEC calling it “a multi-billion-dollar crypto asset securities fraud.”

The Justice Department’s investigation reportedly covers similar ground to the SEC’s, suggesting fraud charges will play a part in the mooted prosecution.

This will come as unwelcome news to Do Kwon, wherever he may be.

Kwon long gone

Kwon is a South Korean national that founded Terraform Labs in 2018 in Singapore, where he was based.

However, after the collapse of the Terra/Luna trading system in May 2022, Kwon disappeared and has been effectively on the run from authorities since, with his current location unknown.

South Korea issued an arrest warrant for Kwon, along with five colleagues, in September 2022, shortly followed by Interpol issuing a red notice, its infamous “wanted” label which is enforceable in 195 countries.

Despite being a wanted man and maintaining a suspiciously hard-to-pin-down location, Kwon has denied being on the run, continuing to post updates and engage with followers on social media. His last post on Twitter was on February 1, which stated:

“I find that Twitter is a good place for rumors but poor place to get facts. I’ve stolen no money and never had secret cashouts – happy to address specific allegations. In any case, good day to you.”

Since then, it seems to have been radio silence from Kwon, and neither Terraform Labs, Kwon, nor the DOJ has responded to Monday’s reports of the latest investigation and possible criminal charges.

TerraUSD crash

On May 7, 2022, TerraUSD (UST), which was supposed to be pegged to the U.S. dollar 1:1 via an algorithmic relationship with Terraform Lab’s native Luna token, decoupled from its pegged asset after a rapid selloff on digital asset exchanges, and by May 9, had fallen from $1 to 35 cents. Its sister token, Luna, which was meant to stabilize UST’s price, fell from $80 to a few cents by May 12.

The situation continued to spiral, and by May 16, the Terra stablecoin and Luna token were essentially worthless, wiping out a market capitalization of around $45 billion and starting a domino effect in the rest of the digital currency market, which tanked the price of other assets, including BTC, and led to an estimated loss of $300 billion in value across the industry.

The resulting post-mortem has led to the SEC’s fraud charges and now a possible DOJ criminal case on the horizon, with the axe poised to fall on Terraform Labs founder and CEO Do Kwon—if they can find him.

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