"Crypto Crooks" is sponsored by Chainalysis.

We’d finished writing and recording this show by February 2023. But February and March were busy months for the Securities and Exchange Commission, the U.S. Department of Justice and the authorities of Montenegro. They’ve all been going after Do Kwon. And they’ve all had some very interesting successes.

So, we’re back with a bonus episode. We break down everything that’s happened, explore what it reveals about Do Kwon, his empire and his collaborators, and explore the true extent of one of the most brazen cons in modern financial history.

Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, web3 companies, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and business intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com.

“Crypto Crooks” is a CoinDesk Podcast Production. The executive producer is Jared Schwartz, with additional production by Eleanor Pahl, Nora Battelle, Jonas Huck, and Moon Beast. Fact-checking is by Amber Von Schassen, and sound design and music are by Altus Noumena. This show is written and voiced by David Z. Morris.

Audio Transcript: This transcript has not been edited and may contain errors.

DAVID Z. MORRIS:

It’s a well-worn adage that time moves faster in crypto. And in just the two months since we finished writing and recording our season about Do Kwon and Terra, the story has evolved dramatically.

On February 16th of 2023, 9 months after the Terra blockchain collapsed to zero, the U.S. Securities and Exchange Commission filed civil charges for securities fraud against Do Kwon and Terraform Labs. The SEC accuses Do Kwon of even bigger deceptions and crimes than we described in our first four episodes. Among the allegations is that Do and allies have stolen funds at a scale far beyond any previous estimates, netting at least $100 million dollars by selling assets they still controlled after the Terra collapse.

These and other new details from the SEC help reframe some parts of the story we’ve told over the past four episodes. Our main focus has been on the flaws in the very idea of an algorithmic stablecoin. We showed how, despite its big promises, the algorithmic stablecoin TerraUSD could not possibly work. We compared Do Kwon to Elizabeth Holmes, who promised Theranos investors far more than she could deliver.

Both later tried to defend themselves by saying that failure wasn’t the same thing as fraud. Perhaps they were just a bit naïve, a bit too ambitious, flew just a bit too close to the sun. But is it a crime to dream big? They were following the old Silicon Valley adage: “fake it ‘til you make it.” They just fell a bit short on the “make it” part.

But according to the SEC, Do Kwon was just faking it. He didn’t overpromise and underdeliver – they allege he defrauded investors intentionally and knowingly, from nearly the very beginning.

And if that’s true, we now have a much better idea of exactly how he did it.

The SEC charges turned out to be just the beginning of a string of very bad news for Do Kwon, Terraform Labs, and their associates. On March 13 of 2023, the Wall Street Journal reported that the U.S. Department of Justice was probing the TerraUSD collapse. The same day, Bloomberg reported that prosecutors were reviewing communications, including those from the trading firm Jump Trading and Jane Street, for possible signs of market manipulation.

Then, on March 23rd of 2023, came the news that everyone was really waiting for.

Officials of the small Balkan nation of Montenegro announced that their police… had placed Do Kwon under arrest.

Montenegro lies just to the southwest of Serbia, where Do Kwon had reportedly fled by late 2022. The arrest was quickly confirmed by both South Korean law enforcement and by Interpol.

Soon photos emerged of Do Kwon in handcuffs, being escorted by Montenegrin police. He wore a drab Nike sweatsuit and a black baseball cap, and appeared to have put on considerable weight while on his international flight from justice.

He had been arrested, according to Bloomberg, alongside Han Chang-Joon, Chief Financial Officer of Terraform Labs. Montenegran law enforcement claimed the two were captured while attempting to board a private jet bound for Dubai, and were carrying forged Costa Rican and Belgian passports.

There’s no evidence that Do Kwon speaks either Spanish or French, which might have made these frauds easier to spot than TerraUSD was for his investors.

Do Kwon’s arrest unleashed a flurry of further activity by law enforcement around the globe. Within hours, U.S. Federal prosecutors filed eight criminal charges against him, adding to the civil charges filed previously by the U.S. Securities and Exchange Commission. The new charges included conspiracy to defraud, securities fraud, and wire fraud.

Then, on March 27th, Bloomberg further reported that South Korean authorities were renewing efforts to arrest and detain Daniel Shin, the famed South Korean tech wunderkind who cofounded Terraform Labs with Do Kwon.

There remain plenty of legal proceedings before this and other loose ends are tied up. Montenegrin authorities have said they will cooperate with extradition requests, but it’s unclear whether South Korea or the United States has the winning claim.

But thanks to the SEC charging documents in particular, we do know a lot more about exactly how Do Kwon conned the world.

Welcome to a special “Crypto Crooks” bonus episode: “Between the Moon and Montenegro: Do Kwon Goes to Jail.”

The SEC charges filed on February 23rd contain massive revelations about the true nature of Terraform Labs and the Terra blockchain. Defenders, especially Do Kwon himself, have argued that the Terra system, and especially its TerraUSD stablecoin, were merely an experiment that failed. But the SEC alleges in no uncertain terms that Do Kwon “perpetrated a fraudulent scheme that led to the loss of at least $40 billion [dollars] of market value, including devastating losses for U.S. retail and institutional investors.”

The charging documents include lengthy arguments that Luna and other Terra-based assets were securities, and that their sale in the U.S. was illegal. It also includes many entirely new details of elaborate, premeditated steps Kwon and his cronies took to deceive investors and enrich themselves.

The SEC claims, for a start, that Do Kwon specifically ordered Terraform Labs employees to falsify Terra blockchain records. The goal was to create the false impression that the Terra blockchain was being used to process payments made via the Chai payments network.

The SEC also claims that Do Kwon and/or his affiliates have cashed out roughly $100 million dollars’ worth of Bitcoin, originally intended to backstop TerraUSD, through a Swiss bank. This is the biggest and most specific claim yet that Kwon has cashed out system funds – an accusation we heard him deny in post-collapse media appearances.

The most important of the SEC’s new allegations, though, is that Terraform Labs worked with outside trading firms to support the illusion that TerraUSD’s self-balancing algorithm actually worked to keep its price pegged to one dollar. Both through these relationships and through more direct methods, the SEC says that Do Kwon and Terraform repeatedly, and perhaps constantly, intervened in the market for Luna and TerraUSD.

In one specific case, a U.S. based trading firm is alleged to have participated in a secret bailout of TerraUSD – an act which may have amounted to collaborating in Do Kwon’s fraud.

In announcing the charges, SEC Enforcement Division Director Gurbir S. Grewal said “As alleged in our complaint, the Terraform ecosystem was neither decentralized, nor finance. It was simply a fraud propped up by a so-called algorithmic ‘stablecoin’ – the price of which was controlled by the defendants, not any code."

In other words, TerraUSD was never the self-balancing ‘stablecoin’ that Do Kwon loudly declared it to be.

The SEC’s allegations of fraud are civil charges, which could lead to fines and bans from the securities and crypto industries, but not jail time.

But the incredible new information laid out by the SEC is also likely to play a role in criminal proceedings against Do Kwon, whether in South Korea or the U.S. The level of detail also suggests that the SEC was able to “flip” one of Do Kwon’s collaborators, offering lighter treatment in exchange for information about the Terra scheme.

We even have one very good candidate for who this hypothetical stool pigeon might have been.

The most important single incident illuminated by the SEC occurred close to a year before Terra’s collapse, in May of 2021, when TerraUSD lost its dollar peg briefly, then returned to it.

The SEC describes how “as [TerraUSD] returned to $1.00, [Do] Kwon and Terraform publicly and repeatedly touted the restoration of the $1.00 UST peg as a triumph of decentralization and the ‘automatically self-healing’ [TerraUSD]/Luna algorithm over the ‘Decision-making of human agents in time of market volatility.”

This certainly looked like a vindication of the algorithmic stablecoin’s design, and the SEC says it led investors to pour “additional billions of dollars into the Terraform ecosystem.

But TerraUSD’s return to its dollar peg in May of 2021 … was complete fu***g bulls**t.

In our last episode, we mentioned unconfirmed rumors that TerraUSD received a clandestine bailout in that May incident. Myself and other CoinDesk reporters were unable to confirm these rumors. But now, the SEC has receipts.

The agency claims that when TerraUSD first began slipping from its peg in May of 2021, Do Kwon and Terraform “secretly discussed with a third party that the third party would purchase massive amounts of [TerraUSD] to restore the $1.00 peg.” According to the SEC, this firm made net purchases of over 62 million TerraUSD in May. Do Kwon was communicating with the firm directly during this period.

This secret partner’s large purchases of TerraUSD, not the self-balancing algorithm governing swaps between Luna and TerraUSD, pushed the purported stablecoin back up to its one dollar market price.

We’ve previously drawn the parallel between Do Kwon and Elizabeth Holmes, who ran blood tests on commercial Siemens testing machines, but pretended they had been run on her company Theranos’ own machines.

We already knew Do Kwon had concealed his involvement in a previous failed stablecoin experiment called Basis Cash. The U.S. trading firm’s secret bailout of TerraUSD was a parallel Holmes-like deception, an entirely fake demonstration of TerraUSD’s stabilizing algorithm.

The unnamed trading firm was richly rewarded for their help. In exchange for the bailout, they were given the right to buy Luna tokens from Terraform at 40 cents each, at times when those tokens were selling for as much as $90 [dollars] a piece. According to the SEC, the trading firm reaped $1.28 billion dollars in profit by buying these discounted Luna tokens and dumping them on the public – despite having knowingly participated in a deal that should have made it obvious that the token was a valueless, broken fraud.

The SEC does not name the U.S. trading firm. But on February 17th, CoinDesk reporters Tracy Wang and Sam Kessler were able to identify it via sources close to the situation. According to those sources, Terraform Labs’ counterparty in committing an act that formed the basis of a $40 billion dollar fraud was Chicago-based Jump Crypto. (A side note: Tracy Wang was also the recent recipient of a Polk Award, one of the most prestigious in journalism, for her reporting on FTX.)

Legal implications aside, participating in a Terra bailout would have made sense well beyond the $1.28 billion that the SEC says Do Kwon’s trading partner was able to profit from their agreements with Terraform Labs. Jump Crypto was an early backer of Terraform Labs and Luna, and would later contribute financing to building the Luna Foundation Guard’s bitcoin reserve. They bet their reputation and cash on Do Kwon – bailing him out would have made all the sense in the world.

The implications here – including who was culpable, and for what – will be up to regulators, prosecutors, and courts to settle. But one possible interpretation is that Jump Crypto, with backing from parent company Jump Trading, were not just counterparties to, but active collaborators in, a fraudulent scheme.

At the same time, sources speaking to CoinDesk have argued that the level of detail in the SEC’s charges strongly suggests that sources within Jump cooperated with the SEC’s investigation into Do Kwon.

This may suggest that Jump Crypto, or individuals within the organization, shared information about Do Kwon with the SEC in part to protect themselves from prosecution.

The SEC’s charges also detail the great lengths Do Kwon and Terraform went to deceive investors about the relationship between Terraform Labs and the payments platform Chai.

Remember that South Korean tech entrepreneur Daniel Shin was a cofounder of the Terra project with Do Kwon. Shin cofounded Chai in conjunction with the launch of the Terra blockchain, and for years Do Kwon touted Chai as a major use case for Terra and its algorithmic stablecoins.

We’ve already discussed how Kwon overstated and misrepresented the Chai relationship, citing it as a major user of Terra for many months after Chai had severed any connection to the blockchain. When challenged on this after the collapse, Do Kwon simply claimed that he hadn’t known the relationship had ended.

But according to the SEC, none of this was an innocent mistake. In fact, it was just the tip of the iceberg of a much more elaborate deception.

“To further deceive investors,” the SEC stated, “Terraform [Labs] and [Do] Kwon recorded complete Chai transactions onto the Terraform blockchain to make it appear as if they were processed on the blockchain when, in fact, they were not. The purported ‘real-world use’ of the Terraform blockchain was a literal fabrication.”

The SEC recounts various instances when Kwon told Terraform investors that the “backend” of Chai payments was processed and settled on Terra. But the reality was much weirder.

“To carry out this deception,” the SEC continues, “Terraform programmed a server … to receive and process data about Chai transactions, and then issue instructions to the terraform blockchain to replicate those transactions as if they had originally ‘settled’ on the Terraform blockchain.”

This meant creating, again according to the SEC, a mind-boggling 2.7 million crypto wallets, controlled by Terraform Labs, that replicated Chai transactions. These wallets were funded from a central, Terra-controlled pool of stablecoins.

The SEC was able to trace all of these connections. The charging documents also cite an internal message between Terraform employees on October 9 of 2021. One worker tells another that “basically chai doesn’t need Terra to work … [Terra] copies chai’s transactions from their database to create [transaction] activity.”

There’s another, even more airtight piece of evidence that Terra was not being used to process real Chai transactions: the SEC identifies five periods between October of 2021 and March of 2022 when the Terra blockchain stopped creating new blocks or confirming any transactions for at least a full day.

“Yet,” the SEC writes, “there is no evidence that the Chai payment application was not functioning during those periods.”

In our previous episodes, we talked to Hyungsuk Kang about his decision to leave Terraform in 2020, based on his mounting distrust of Do Kwon and the organization. Some who stayed at Terraform clearly had similar misgivings, according to a chat message from an unnamed Terraform employee, which the SEC says was written on September 1 of 2021.

“Working at Terra has reinforced my belief in conspiracy theories,” the employee wrote. “Just the white lies to prop up anchor and mirror and the illusion of decentralization and true extent of Chai adoption … all from the armchair of a single man sipping whiskey.”

The ‘man sipping whiskey,’ according to the SEC, is a reference to Do Kwon.

Do Kwon might have been sipping some very fine whiskey indeed during his brief sojourn in the Balkans.

The final major claim by the SEC is that, contrary to endless denials by Do Kwon, “defendants transferred over 10,000 Bitcoin from Terraform and Luna Foundation Guard crypto asset platform accounts to an un-hosted wallet …”

That Bitcoin would be worth a total of nearly $300 million dollars at current prices. And the alleged thieves have been cashing out.

According to the SEC, “Terraform and Kwon have transferred … Bitcoin from this wallet to a financial institution based in Switzerland. … Between June 2022 and [February 2023], over $100 million in fiat currency has been withdrawn from that Swiss bank.”

One other event took place after we finished recording this season of “Crypto Crooks.” While tangential to Terra and Do Kwon, it provides some bracing context.

Dedicated listeners may remember that in our first season about Bitconnect, we referred to an older crypto-inspired scam called OneCoin, and its alleged ties to organized crime in the Balkans.

The story of Onecoin took an even darker turn on February 17th of 2023, with a new report from the Bureau for Independent Reporting and Data, or BIRD, an investigative nonprofit focused on Eastern Europe. The report revealed the possible fate of Ruja Ignatova, the former head of OneCoin, and now one of the FBI’s 10 Most Wanted criminals.

According to disturbing claims made by a reportedly drunken informant, and recorded in police documents obtained by BIRD, Ignatova was murdered as long ago as 2018, on orders from a Bulgarian drug lord known by the name Taki.

The murder allegedly occurred on a yacht, somewhere between Greece and Italy. Ignatova’s body, the informant said, was dismembered and thrown into the Ionian Sea.

This claim is unsubstantiated, and its connection to Do Kwon is only circumstantial. Serbia seemed like an odd destination when Do Kwon fled there in 2022, and in our last episode we speculated that he might be entangled with organized crime partners in the region, where mafias have increasingly become specialists in crypto fraud.

Ruja Ignatova was widely believed to have fled to Bulgaria because her criminal contacts there had influence over the police. In the end, though, Ruja’s would-be protectors may have decided it was easier to simply get rid of her than to hide her from the long arm of Interpol and the FBI.

As of March 2023, it seems Do Kwon is in the hands of honest cops in Montenegro. That certainly seems preferable to the alternative.

The SEC’s February fraud charges support the idea that Do Kwon knowingly and intentionally ran one of the biggest financial and investing frauds of all time. The regulators’ allegations of overt deception make it seem much less likely that Do Kwon actually believed any of his own promises about the stability of the TerraUSD token. While claiming in public that TerraUSD was magically self-balancing, he was allegedly cutting backroom deals with trading firms to support its price, while falsifying transaction records at a huge scale.

Do’s alleged machinations tricked average investors – but also venture capitalists, whose public, enthusiastic endorsements likely led more victims to believe Do Kwon’s claims. Some of those venture capitalists even managed to get out with huge profits before Terra collapsed – effectively by selling their Terra assets to new retail investors that their own endorsements may have helped attract.

Influential, high-profile investors might have detected the fraudulent schemes described by the SEC if they’d spent more time examining Terraform’s operations – and less time on conference stages pumping their own bags. Or they might simply have listened to the legion of financial experts pointing out fundamental and obvious flaws in Terra’s financial engineering.

A little more digging, a little more thinking, and people like Mike Novogratz of Galaxy Digital, or Kyle Davies of Three Arrows Capital, might have saved their own clients money – and reduced the damage to Do Kwon’s victims worldwide. Instead, they praised him as a genius and backed him with immense amounts of real money.

Do Kwon conceived and designed a massively complex and very opaque fraud – what Hyungsuk Kang called a “prolonged exit scam.” But he couldn’t have pulled it off without help from a variety of investors and outside supporters.

So it’s gratifying to know that Do Kwon will likely face trial for his brazen scheme. But the law can’t always protect you. And hanging on the words of prominent investors bloviating on conference stages isn’t always a safe bet, either.

If you want to play at the frontiers of financial technology, watch out: you never know where you’ll run afoul … of “Crypto Crooks.”

Thanks for joining us for the incredible saga of Do Kwon and Terra. Be sure you’re subscribed to the “Crypto Crooks” feed in your favorite podcast app. We’ll have more updates coming soon - including a sneak peak at our next season, when we’ll bring you another wild tale from crypto’s untamed frontiers.