South Korean authorities launch probe into Terra crash

South Korean authorities launch a full-scale probe against Do Kwon and Terra team, alleging intentionally ignored design flaws and price manipulation.
May 31, 2022 - Cynthia Chung

South Korean authorities are currently summoning all employees of Terraform Labs behind the Luna classic and TerraUSD tokens to investigate potential signs of intentional price manipulation and other issues, according to the local television network JTBC’s report on Saturday. 


The joint financial and securities crime investigation unit of Seoul Southern District Prosecutor’s Office has subpoenaed all Terraform Labs employees including those who were involved with the development of the Terra Blockchain in 2019, per the report. 


One employee has testified that there were internal doubts concerning the sustainability of Terra and has warned Terra founder Do Kwon that the algorithmic stablecoin designed to protect the asset’s peg to the U.S. dollar could collapse at any time. However, the warnings went unheeded by the founder, who pushed ahead with the launch.  


'Even at that time, there was a warning inside that there could be a collapse at any time, but CEO Kwon Do-hyeong forced the coin to be launched,' said the employee.


South Korean authorities are investigating whether Kwon was aware of these issues and if there was intentional price manipulation of LUNC or UST. 


The authorities also alleged that the mechanism was faulty in the first place, given that the stablecoin UST is not pegged to a stable collateral or profit model. ‘At a certain point in time, there is no other way but to collapse because it cannot handle interest payments and fluctuations in value,’ the authorities said.


CEO of Circle, Jeremy Allaire, which issues the second-largest stablecoin USDC, told Protocol in an interview after the collapse that Terra was a ‘house of cards’ that was bound to fail.


On top of the above, authorities are also looking into whether domestic cryptocurrency exchanges underwent proper procedures for listing LUNC and UST. 


With the investigation, South Korean authorities are trying to determine if there was intentional price manipulation of LUNC or UST. Authorities are also looking into whether the tokens followed proper procedures for listing on domestic exchanges.


A Korea Herald report alleged that Terraform Labs had shut down its South Korean branch last year and dissolved the same branch months before the shutdown was announced publicly. It is speculated that Kwon closed the branch to evade taxes. South Korea’s national tax agency penalized Terraform Labs and Kwon with a US$ 78 million fine for tax evasion eventually. 


According to the Financial Services Commission in South Korea, the number of investors affected by the Terra collapse totaled 280,000.  


The news comes as Terra’s new Blockchain, Terra 2.0 went live on May 28, in an attempt to revive the fallen Terra ecosystem. 


Photo: Pixabay


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