Do Kwon speaks again: There is a difference between failure and fraud, and he is confident in rebuilding Terra

Original Author: Alexander Osipovich, Jiyoung Sohn

Original Title: 《Do Kwon's Crypto Empire Fell in a $40 Billion Crash. He's Got a New Coin for You.》

Translation: Hu Tao, Chain Catcher

Do Kwon built a cryptocurrency empire with a fervent following on Twitter, which collapsed last month in a $40 billion crash. Despite angry investors, government investigations, and a downturn in the crypto market, the South Korean entrepreneur is now trying to make a comeback.

"I am confident in our ability to rebuild stronger than before," Do Kwon told The Wall Street Journal.

Do Kwon is backing the launch of a new version of Terra, the blockchain network behind the failed UST and Luna. UST is a so-called stablecoin designed to maintain its value at $1, but the token is now worth less than a cent. Its collapse triggered a more than 99% drop in Luna, a cryptocurrency that was pegged to the dollar by UST.

The damage caused by this internal collapse has affected thousands of investors worldwide, including many who deposited savings into Anchor Protocol, a crypto bank that offered high yields for UST deposits. The crash also foreshadowed a massacre in the crypto market this month: a brutal sell-off led the lending platform Celsius Network to freeze accounts worth billions.

Since the UST collapse, a group representing more than 90 people in South Korea has filed complaints against Do Kwon, accusing him of fraud and illegal fundraising. A spokesperson for the Seoul Southern District Prosecutor's Office confirmed that an investigation into Luna and UST is underway but declined to provide details. According to local media, an investor rang the doorbell at Do Kwon's home in Seoul, prompting his wife to seek police protection. This investor—a livestreaming cryptocurrency influencer—later said on his channel that he lost money on Luna and wanted to speak with Do Kwon in person.

Last week, a U.S. law firm representing Chicago investors who suffered losses in the UST collapse filed a lawsuit seeking a class action against Do Kwon, his company Terraform Labs, and several others, accusing them of fraud and selling unregistered securities.

Terraform Labs stated that it would not comment on any active investigations. It called the lawsuit baseless and indicated its intention to defend itself.

30-year-old Do Kwon said, "The recent events have hit me hard, and I hope all the affected families take care of themselves and their loved ones."

Earlier this year, when Luna's trading price approached $100, analysts stated that Do Kwon was a billionaire based on the number of tokens he held. Do Kwon said that might be the case, although he "never really calculated"—and he lost nearly all of his net worth in this crash. "It doesn't bother me," he added, "I live a fairly frugal life."

The new Terra blockchain was launched in late May after most Luna holders approved the move through a shareholder-style vote. The nearly worthless old Luna was renamed "Luna Classic," and holders of UST and Luna Classic received a new token called Luna.

So far, progress has not been smooth: according to data provider CoinGecko, the new Luna started trading at $18.87 on May 28, then immediately plummeted, with a recent trading price of $1.97.

Mati Greenspan, founder of crypto research firm Quantum Economics, said, "I don't understand why anyone would want to invest in Luna 2 after seeing Luna 1 explode so dramatically."

Supporters of the relaunch hope developers can build applications based on Terra technology, sparking activity that gives new Luna value. "Many builders are restarting their applications on the new chain," Do Kwon said.

The relaunch may be Do Kwon's final act of defiance; he is a figure with divided followers in the cryptocurrency community. His admirers call themselves "fanatics," while his critics see him as a snake oil salesman.

"I feel very sad for Do Kwon because his name is now dragged through the mud," said Ronald AngSiy, an executive at Intellabridge Technology Corp., which allows people to earn cash deposit interest through cryptocurrency investments.

Mr. AngSiy interacted with Do Kwon at business meetings and served as an ambassador for Terra. He said he lost over $1 million in personal investments during the Luna crash but holds Do Kwon in high regard. "On Twitter, he can come off as arrogant, but in person, he is not like that," he said.

Others in the crypto community say Do Kwon orchestrated a complex scam. Cory Klippsten, CEO of cryptocurrency company Swan Bitcoin, said, "It's very clear from how this person tweets, how he speaks on camera, and how he presents himself that he is a fraud."

Do Kwon denied Klippsten's description. He pointed out that prominent figures in the crypto industry believed in UST's future just like he did, and he personally lost money in the crash. "I made confident bets and statements on behalf of UST because I believed in its resilience and value proposition," he said, "I lost those bets, but my actions were 100% consistent with what I said. Failure and fraud are different."

According to PitchBook, Terraform Labs has raised over $200 million from investors, including Coinbase Ventures and Mike Novogratz's Galaxy Digital Holdings Ltd., since its inception. Coinbase stated that its investment in Terraform Labs is small and that it did not directly invest in UST or Luna.

Do Kwon attended a prestigious foreign language high school in Seoul, where he excelled in English debate and participated in the World Schools Debating Championships with the South Korean team for three consecutive years. Those who knew him as a teenager described him as charismatic and fond of making controversial statements that irritated classmates.

He graduated from Stanford University in 2016 with a degree in computer science. After working at Microsoft and Apple and founding an unsuccessful web startup called Anyfi, he turned to cryptocurrency.

In 2018, Do Kwon co-founded Terraform Labs with respected figure in the South Korean startup scene, Daniel Shin, to develop the Terra blockchain. Daniel Shin declined to comment for this article.

According to a white paper co-authored by Do Kwon in 2019, the project's vision was to create a series of Terra stablecoins pegged to the U.S. dollar, South Korean won, and other traditional currencies. The idea was that people could use these tokens in everyday transactions—called TerraUSD, TerraKRW, etc. Unlike major stablecoins like USDC, Terra stablecoins did not have real dollars or investments backing them but used financial engineering to maintain price stability. Do Kwon believed this design made it harder for governments to control transactions. He adopted the motto: "A decentralized economy needs decentralized money."

Kwon often cited the South Korean payment app Chai using its stablecoin as an example to differentiate Terra from competing crypto projects. Chai was launched in 2018 by his partner Daniel Shin's startup Chai Corp. The app initially used Terra to process payments, with blockchain technology rarely used in the real world. As Chai gradually served millions of users, Do Kwon's comments deepened the impression that the user base for transactions using Terra stablecoins was stable, acting as a stabilizing force during market fluctuations.

However, a review of his past comments shows that Do Kwon repeatedly exaggerated the connection between his blockchain project and Chai.

A spokesperson for Chai stated that Do Kwon and Daniel Shin parted ways in March 2020. The spokesperson said that by 2021, Chai no longer used Terra's blockchain technology or digital assets to process its payments or store its assets. According to the spokesperson, Chai and Terra maintained only a marketing partnership from May 2021 to March 2022.

Nonetheless, in April 2021, Do Kwon told an interviewer that 2.6 million South Koreans were using Terra stablecoins for payments. Just this March, he mentioned Chai using Terra stablecoins on a podcast.

Terraform Labs and Do Kwon stated that they have always sought to be truthful in describing Terra and Chai. They said Do Kwon's comments were accurate because a partnership was established, allowing Chai's users to convert Terra's won stablecoin into "Chai assets" for payments. A Chai spokesperson stated that this feature was adopted in May 2021 as part of the partnership but was scaled back four months later due to low demand. The spokesperson said that today, all of Chai's services are unrelated to Terra.

Insiders said several Terra team members resigned in 2020 due to concerns about Do Kwon's direction for the project. One of their concerns was Do Kwon's insistence on setting fixed yields for deposits in Anchor Protocol to attract users to use UST. Team members stated that Do Kwon's approach was unsustainable and urged the adoption of floating yields to respond to market conditions.

When Anchor launched in March 2021, its yield was set at around 20%, a high rate that attracted billions in investor funds before the UST collapse. Terraform Labs declined to comment on former employees but noted that Anchor began to move away from fixed yields earlier this year.

Insiders said another concern that led to team members' resignations was Do Kwon's push to launch Mirror Protocol, which they believed violated U.S. securities laws. Mirror Protocol is essentially a pseudo-stock market where cryptocurrencies track the prices of U.S. stocks like Apple and Tesla.

The project made Do Kwon a target of the U.S. Securities and Exchange Commission, which began investigating Mirror Protocol last year. In September, the SEC issued him a subpoena at a crypto conference in New York. A month later, he sued the SEC to block the agency from enforcing the subpoena. In February of this year, a judge ruled against Do Kwon, and he lost an appeal earlier this month.

Terraform Labs stated that it has been complying with procedures and relevant court orders. It said Mirror Protocol is not a market or exchange as defined by U.S. law. An SEC spokesperson declined to comment.

As UST grew in scale, critics—including academics, crypto fund managers, and Do Kwon's competitors—warned that it was vulnerable to collapse. They pointed out that similar algorithmic stablecoins had failed in a so-called death spiral after their mechanisms for pegging to the dollar collapsed.

Do Kwon dismissed such criticisms on Twitter. In March, he called those who said UST might lose its peg "idiots." Last year, after British financial blogger and crypto skeptic Frances Coppola expressed concerns about bank runs on crypto lending platforms, Do Kwon tweeted, "I don't debate with poor people on Twitter, sorry, I'm not making any changes for her right now."

"He was rude to me," Ms. Coppola said. When asked about these tweets, Do Kwon told The Wall Street Journal, "Do I regret some of the things I said in the past? Yes."