South Korea and US Authorities Investigate Terraform Labs

BigONE Exchange
4 min readJun 21, 2022


Terra is back in the spotlight after cryptocurrency investors filed allegations of fraud and financial violations against Terraform Labs founders Do Kwon and Daniel Shin. South Korean authorities have launched a full-scale investigation into Terraform Labs, the parent company of Terra (LUNA), which will be led by a joint financial and securities crime investigation unit of the Southern District Prosecutor’s Office in Seoul, according reports.

Back in May investors in the cryptocurrency market were horrified to see Terra’s algorithmic stablecoin UST and its governance token LUNA lose their peg to the U.S. dollar and more than 99% of their value in a week. In what appears to be somewhat dubious circumstances, the two once-popular cryptocurrencies plunged into a perfect storm, causing enormous losses for investors in the market, and it made headlines in the worst possible way.

Of course, in any financial field, especially one as new as cryptocurrencies, there are times when the market crashes due to volatility. When LUNA’s collapse was irreversible, it appeared to have plans for a reboot and was primed for a comeback. In what Terraform Labs calls its “renaissance plan,” Terra operates alone by creating a new blockchain that will run parallel with the old one. The old LUNA tokens were renamed Terra Classic and Luna Classic (LUNC), while the new tokens were renamed Terra 2.0 and LUNA. Still, the debacle of UST and LUNA is fresh, making many investors wary of the brand-new Terra 2.0 and its tokens.

Recently, some local news reports in South Korea have surfaced announcing that South Korean authorities have launched a full investigation into Terra (LUNA) and its parent company. Terra (LUNA) is part of Terraform Labs, and the entire company will now be under investigation. The investigation will be led by the Financial and Securities Crime Joint Investigation Team of the Southern District Prosecutor’s Office in Seoul. Local media in South Korea said the investigation team had obtained some critical evidence to support its investigation of violations. In addition, according to them, some Terraform Labs employees saw warning signs of the volatility of the tokens that led to the crash before the crash event, which also made Terraform Labs employees feel a lot of stress.

The South Korean government announced the investigation after five South Korean cryptocurrency investors filed allegations of fraud and financial violations against Terraform Labs founders Do Kwon and Daniel Shin, saying their combined damages amount to 1.4 billion won ($1.1 million). The investors who made the allegations hired LKB & Partners, a well-known South Korean law firm, to sue Terraform Labs. The law firm also alleges Kwon and Terra are in violation of the Act on the Regulation of Conducting Fund-Raising Business Without Permission, as the project allegedly profited from the 19.4% interest rate on Anchor Protocol through UST, Yonhap News Agency reported. Later, Terraform Labs commented in a statement, saying, “LUNA and Terra were designed and issued to attract investors, but they failed to inform investors of the pitfalls and risks involved properly. In particular, The infinite expansion of the LUNA issue is the most criticized flaw by investors, who admit that it is equivalent to deceiving investors.” Once this statement was released, it caused a public outcry. If the charge is established, Terraform Labs founders Do Kwon and Daniel Shin will face severe penalties, including jail time, fines, and of course claims for compensation.

Separately it’s been reported that South Korean authorities are investigating Terraform Labs and employees on charges of tax evasion and market manipulation. According to the sources quoted in The Korea Herald, prosecutors are looking at whether they can make a Ponzi scheme case against the Anchor Protocol, under which depositors of TerraUSD are guaranteed a 20% annual return. “Kwon’s remarks promising returns could provide a key clue,” a prosecution official said. However, police said that the alleged embezzlement of BTC from the company’s treasury was unconnected to Do Kwon. “Authorities managed to freeze the stolen funds with the help of a crypto exchange until the investigation is complete. However, the amount of the stolen funds hasn’t been disclosed,” reported Cointelegraph on June 9.

Lawyers file complaints against Do Kwon and co-founder Daniel Shin
(source: Korea Herald)

In addition, Bloomberg reported on June 9 that the SEC was looking at whether Terraform Labs had broken any US laws in how it marketed its crypto products. Specifically, the SEC’s Division of Enforcement are investigating whether investor protection rules were broken through Terraform’s marketing of the tokens. On June 8 the US Court of Appeals for the Second Circuit affirmed a district court order requiring compliance with investigative subpoenas served by the SEC on Terraform Labs Pte Ltd and Do Kwon. Terraform and Kwon argued on appeal that the SEC violated its Rules of Practice when it served the subpoenas by handing copies to Kwon, Terraform’s CEO, while he was present in New York, and that the district court lacked personal jurisdiction because Kwon and Terraform had insufficient contacts with the US.

In rejecting those arguments, the appellate court reasoned in relevant part that Terraform’s and Kwon’s “reading of the Rules is contrary to the text and would produce absurd results by allowing a party to insist on service through counsel but allow the party to block said service by not authorizing their counsel to receive any filings.” The court further rejected Terraform’s and Kwon’s arguments, noting the district court’s jurisdiction over Terraform and Kwon arose from their “purposeful and extensive U.S. contacts,” such as promoting to U.S. investors, employing U.S.-based personnel, and contracting with U.S.-based entities, according to the SEC litigation release.



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