Do Kwon: South Korean crypto ‘genius’ turned disgraced fugitive

Once hailed as a genius, South Korean entrepreneur Do Kwon — who now faces multiple criminal charges for his cryptocurrency failure — was a brash industry figure whose fame disintegrated into notoriety. world.

After months on the run, the 31-year-old, whose full name is Kwon Do-hyung, was arrested in Montenegro on Thursday after he was caught trying to board a flight using fake Costa Rican travel documents .

He is accused of fraud following last year’s dramatic implosion of his company Terraform Labs, which wiped out an estimated $40 billion in investor money and rocked global crypto markets.

Immediately after his arrest, the United States hit him with a slew of charges for what it called a “multi-billion dollar crypto asset fraud” and South Korea, where he faces on separate charges, said he wanted to extradite him.

The cryptocurrency he created, an “algorithmic stablecoin” called Terra, was actually a glorified Ponzi scheme, experts say.

Yet as recently as March 2022, Kwon was being described in South Korean media as a “genius” as thousands of private investors lined up to pour money into his company.

“Kwon and his story are a product of our times,” Cho Dong-keun, professor emeritus of economics at Myongji University, told AFP. “He knew how to win the hearts of those who so desperately wanted to make a fortune all at once. He also knew how to harness their anxiety and turn it into massive profits.”

– Elite connections – Born in 1991, Kwon attended South Korea’s elite Daewon Foreign Language High School where, according to a book he wrote about his school days, he founded an English-language student newspaper and has competed in various English Debating Championships.

He continued his studies in computer science at Stanford University in the United States and reportedly interned at Apple and Microsoft before returning to Asia to start his own business.

In 2018, he co-founded Terraform Labs with Daniel Shin – who is linked to South Korea’s elite Samsung family through his uncle – and developed the TerraUSD and Luna currencies.

He quickly rose to fame, thanks in part to Shin’s connections, successfully positioning himself as a young luminary in the industry.

TerraUSD was marketed as a “stablecoin”, a type of cryptocurrency that is usually pegged to stable assets such as the US dollar to avoid drastic price swings.

In 2019, he was included in the Forbes list of 30 under 30 in Asia.

Forbes wrote that “Kwon’s price-stable cryptocurrency, or stablecoin, attracted 40 million users to work with the company when it launched in January 2018.”

“In a bid to build a blockchain-based payment system, Terra raised $32 million from crypto giants such as Binance,” he said.

– ‘S Korean Elizabeth Holmes’ – But experts had long warned that Kwon’s model was fundamentally flawed, with some calling it outright a Ponzi scheme.

Unlike other stablecoins backed by real-world assets such as silver or gold, TerraUSD was algorithmic – tied only to sister currency Luna, using math and incentive mechanisms to maintain their peg.

“Algorithmic stablecoins like Terra/Luna were doomed from the start,” Christian Catalini, founder of MIT’s Cryptoeconomics Lab, told AFP.

“Things may work for a while as the ecosystem grows, but are bound to hit a death spiral at some point.”

A full investigation of Kwon should help clarify what happened when Terra/Luna collapsed, he said, adding that it was necessary to improve the crypto industry as a whole.

“We need to ensure that bad actors are not able to use technology to engineer scams and perpetuate other forms of fraud or financial crime,” he said.

Kwon’s impressive rise and dizzying fall is now compared to that of convicted American fraudster Elizabeth Holmes, the disgraced founder of medical technology startup Theranos.

Kwon “is like Holmes, another elite who went to Stanford,” writes the Korea Economic Daily newspaper.

Cory Klippsten, CEO of crypto trading app Swan.com, drew a similar parallel on Twitter last year.

Kwon had “major Elizabeth Holmes vibes,” he wrote before the meltdown. “Frightening levels of arrogance displayed, 99.99% of the time mean fraud.”

Kwon escaped from South Korea before the disaster struck in May last year and has been in hiding ever since, despite claiming on Twitter that he was not “on the run”.

South Korea eventually revoked his passport and asked Interpol to put him on the red notice list.

“A responsible adult and an entrepreneur would have stayed and explained,” said Professor Cho of Myongji University.

“The fact that he tried to evade the authorities by even using fake passports shows his character.”