U.S. federal authorities charged a South Korean cryptocurrency mogul with defrauding investors of more than $40 billion between 2018 and 2022, following the collapse of his crypto platform.
Do Hyeong Kwon, 33, was extradited from Montenegro on New Year’s Eve. He pleaded not guilty to multiple counts of securities fraud and wire fraud, all related to his failed company Terraform.
As CEO, Kwon advertised his products to customers as a “stablecoin,” meaning that their worth was tied to the value of a separate asset, and did not rely on financial reserves to keep the business operational.
Prosecutors, however, allege Kwon knew his algorithms did not work as advertised, and that he secretly manipulated the value of Terraform’s cryptocurrencies to keep investors from pulling the plug.
“As we allege, this fraud and the crash of Terraform’s cryptocurrencies in May 2022 erased over $40 billion in investor assets, causing devastating losses to countless investors in the United States and around the world,” said U.S. attorney Daniel M. Gitner.
One of the core misrepresentations Kwon made was that his platform used a computer algorithm to keep the value of Terraform’s so-called “stablecoin” in line with assets such as other cryptocurrencies or the U.S. dollar.
When faults in the algorithm emerged, leading to pitfalls in cryptos’ worth, Kwon solicited high-frequency trading firms to purchase large amounts in order to artificially support their value, thereby deceiving investors. Prosecutors said that Kwon told a Terraform employee that if these firms had not propped up his products’ value, Terraform might have been “f…ed.”
Other assets under Terraform’s control were similarly supported via automated trading bots and fake blockchain transactions, to promote interest and liquidity in their perceived value, when in actuality there was little to none.
“For at least four years, Kwon allegedly played puppet master to maintain this crafted illusion and ensnare investors,” said FBI Assistant Director in Charge James E. Dennehy.
By May 2022, Terraform’s value crashed, leading to Kwon’s hundreds of thousands of investors incurring losses of more than $40 billion. Prosecutors allege that he then attempted to cover his tracks by submitting a misleading third party audit, and that he then tried to run off with no less than $66 million in ill-gotten gains, laundered through blockchains, cryptocurrency exchanges, and international bank accounts.
During this period, he continued to mislead the public, saying that he was fully cooperating with all law enforcement inquiries. A recorded conversation with one of his associates in August 2022, however, revealed that he was seeking political protection from multiple countries and that his strategy to deal with investigators was to “tell them to f..k off.”
Kwon was ultimately arrested in Europe in March 2023 for using a fake passport in an attempt to flee to a country that does not have an extradition treaty with the United States.
If convicted on all counts, he faces a potential maximum sentence of 130 years in prison.