South Korean Prosecutor Calls for Crypto Entrepreneur Do Kwon to Face Charges in Home Country

“Given the nature of this incident, we think investigating the case in South Korea would be the most efficient way of bringing justice” to investors, Dan Sung-han, head of the team of South Korean prosecutors investigating the circumstances that led to the crash of the two cryptocurrencies, said in an interview with The Wall Street Journal. Most of the evidence and key accomplices of Mr. Kwon linked to Terraform Labs are based in South Korea, he said.

If convicted, Mr. Kwon would likely face the longest jail term for a financial crime in South Korean history, Mr. Dan said, adding that he expected it could top the sentence of 40 years handed out last year for a fraud case involving Seoul-based hedge fund Optimus Asset Management.

Mr. Dan, a 49-year-old prosecutor with two decades of experience, described the launch and subsequent failure of the cryptocurrencies as a “systemic crime” and said prosecution of it has required identifying and tracking down in detail how the business was operated and what types of decisions were carried out. While some fraudulent actions by the Terraform Labs team took place in the U.S., much of the crime Mr. Kwon is accused of occurred in South Korea, he said.

TerraUSD was a so-called algorithmic stablecoin that worked with its sister coin, Luna, via financial engineering to maintain a value of $1. It lost its dollar peg in May 2022 and tumbled alongside Luna, triggering a crash that wiped out the savings of thousands of investors worldwide.

South Korean prosecutors have accused Mr. Kwon and others involved in Terraform Labs of making false claims about the cryptocurrencies and launching them even though they knew the algorithms underpinning them weren’t feasible. They are also accused of using “trading bots” to produce false transactions of TerraUSD to inflate the perceived amount of demand for the cryptocurrency and maintain its price level, among other charges.

Last week, South Korean prosecutors indicted seven individuals, including Mr. Kwon’s co-founder in Terraform, Daniel Shin, on charges including fraud and violations of capital-markets laws and regulations around electronic financial transactions and fundraising. Two others were indicted on charges of breach of trust and illegal acceptance of bribes. Lawyers for Mr. Shin said he left Terraform Labs in 2020 and wasn’t involved in the crash of the cryptocurrencies.

The indictments came after about 10 months of investigating individuals involved in Terraform Labs, and the charges pressed cover crimes committed by Mr. Kwon as well, Mr. Dan said. 

Mr. Kwon would face similar charges if he were extradited to South Korea, Mr. Dan said. In the U.S., Mr. Kwon faces criminal fraud charges from federal prosecutors in New York and a civil lawsuit by the Securities and Exchange Commission. A spokesman for the U.S. attorney’s office for the Southern District of New York declined to comment.

Representatives for Mr. Kwon didn’t respond to a request for comment. His lawyers have rejected the SEC’s fraud allegations, claiming it didn’t have jurisdiction because he didn’t market the cryptocurrencies directly to Americans. They also said neither TerraUSD nor Luna was a security regulated by the SEC.

South Korean prosecutors have indicted individuals for violating the capital-markets law on grounds that Luna is a security, Mr. Dan said. They don’t expect that South Korean courts will challenge that definition, he said, adding that the way Luna was structured and marketed as an investment vehicle clearly fits the definition of a security.

Extradition proceedings will begin after Montenegrin authorities conclude court proceedings in their passport-forgery case against him. Mr. Dan said it is hard to predict how long that will take, noting that it is possible the case could drag out if Mr. Kwon continues to lodge appeals.

Legal experts have said South Korea may hold the upper hand in securing the extradition because it is party to an extradition treaty with Montenegro. The order in which extradition requests were received can also be a factor, and Mr. Dan said it is his understanding that South Korea was the first to make one.

“We’ve collected a large swath of evidence pertaining to the TerraUSD case overall, much of which is information that cannot be easily obtained in the U.S.,” Mr. Dan said. He said a successful prosecution in South Korea could lay the groundwork for further proceedings in the U.S.

“It’s ultimately a matter of which location is more efficient, and what is the best way of bringing justice, and I believe the U.S. is willing to cooperate,” Mr. Dan said.

South Korean prosecutors are committed to locating and securing more assets owned by Mr. Kwon and his team so they can be used for compensating victims, he said. His team has already frozen some 246.8 billion won, or roughly $186.5 million, in South Korea-based assets, including some held by Mr. Kwon.

Mr. Dan said he believes the crash of TerraUSD and Luna has helped advance discussions around the world on the need for tighter regulation of cryptocurrencies. “At the end of the day, it’s about setting up proper protections for investors in the cryptocurrency market and preventing incidents that disrupt capital markets,” he said.

Write to Jiyoung Sohn at [email protected]