Do Kwon's punishment depends on whether cryptocurrencies are securities

Terraform Labs co-founder Do Kwon is taken to court after being arrested in Montenegro on March 24. [AFP/YONHAP]

The key factor deciding the severity of Do Kwon’s punishment will be proving his creations — TerraUSD and Luna — are securities, according to the legal circle in Korea.

Kwon, the mastermind behind the failed cryptocurrencies that resulted in a $40 billion crash, is wanted by Korea, the United States and Singapore. After getting arrested in Montenegro last week, U.S. prosecutors charged him with eight criminal counts of fraud.

In Korea, Kwon is being accused of fraud, fund-raising for business without permission and potentially violating the capital market law on the grounds of price manipulation, if the crypto assets are proven to be securities.

Subjects accused of violating the capital market are given an additional punishment depending on the size of the damage caused. There were around 280,000 Luna investors in Korea when the token crashed last May.

The financial authorities announced in February that security tokens that meet the qualification of distributed ledger will be admitted as a digitalized form of securities, but whether all types of cryptocurrencies are securities has not been made clear.

Prosecutors and the Ministry of Justice are working on the extradition of Kwon from Montenegro, where he is being detained.

“When evaluating TerraUSD and Luna, it’s difficult to prove they are securities because investors earned nothing by the margin of selling and buying Luna, whose price is decided based on the value of TerraUSD,” said an attorney specializing in crypto who spoke on the condition of anonymity.

“But if the whole Terra structure is taken into consideration, like its Anchor Protocol, it may be seen as securities. Even so, proving that it’s a violation of capital market law doesn’t seem easy.”

Anchor Protocol is a savings, lending and borrowing platform built on the Terra blockchain that offered income opportunities to its depositors.

The U.S. Securities Exchange Commission (SEC) Chair Gary Gensler said in 2021 that the SEC considers many cryptocurrency coins and tokens to be securities under the Howey Test.

“If somebody is raising money selling a token and the buyer is anticipating profits based on the efforts of that group to sponsor the seller, that's something that’s a security.”

Some say Kwon will be charged more heavily if sent to the United States.

“The U.S. prosecution seems to have applied all the charges that can possibly be indicted on Kwon,” said John Park, professor of law at Handong Global University, who worked as a prosecutor in Maryland. “Kwon’s act is similar to a Ponzi scheme. If his intention in the stage of designing the system is proved, it will be difficult to avoid heavy punishment.”

Bernard Madoff, who perpetrated a multibillion dollar Ponzi scheme that defrauded investors globally until his arrest in 2008, was sentenced to 150 years in federal prison in 2009. He died in prison in 2021.

“We are trying to repatriate Kwon to Korea through cooperation with authorities in Montenegro following their judicial proceedings, as Kwon is a Korean national and an investigation into any accomplices is also in progress.”

Prosecutors are also seeking to arrest Daniel Shin, co-founder of Terraform Labs. The prosecutors last issued an arrest warrant for Shin in December, but it was dismissed by the court.

BY JIN MIN-JI, LEE CHANG-HOON [jin.minji@joongang.co.kr]