Terra creator withdrew more than 10,000 BTC from collapsed crypto project. Where did the money go?

February 18, 2023 by cryptobreak

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This week it became known that the US Securities and Exchange Commission (SEC) has filed a lawsuit against Terraform Labs and its co-founder Do Kwon. Terraform Labs itself was developing the Terra project, whose collapse last spring led to a prolonged decline of the entire crypto market. The SEC accuses Do Kwon of fraud and misleading investors. In addition, Kwon along with some employees of his company withdrew about 10,000 BTC from Terra after the project’s ecosystem collapsed. Some of the coins were converted into cash using the services of a Swiss bank. We will describe the situation in more detail.

Note that Terra investors have lost huge sums of money, amounting to tens of billions in the process. For example, according to court documents, a pharmacist in California mortgaged his house to get $400,000 that was used to buy the UST steblecoin. He ended up losing everything.

Also mentioned in the same example is an artist from Vermont. He invested $20,000 in the Terra ecosystem, which was originally intended to pay for his son’s college education. That money, too, has disappeared.

A court document on the victims of the Terra ecosystem

The case file also reveals that Do Kwon left a sizeable supply of cryptocurrency for himself.

What will happen to the developers of Terra

The aforementioned bitcoins were deposited on one of the cold wallets, isolated from any centralised platform. Do Kwon has been periodically withdrawing BTCs from the wallet to Swiss bank accounts since May last year. In doing so, the Commission has never been able to identify the name of the entity that handled the crypto-to-cash transfers.

Excerpt from SEC lawsuit

Here’s another commentary from the lawsuit, published in Bloomberg.

More than $100 million was withdrawn from the accounts of that Swiss bank between June 2022 and the date of the lawsuit.

Terra co-founder Do Kwon

It should be noted that Do Kwon is still a wanted man – he disappeared shortly after Terra collapsed. That said, this fact has not prevented Kwon from posting posts on Twitter from time to time and even giving interviews. Since he left South Korea, where Terraform Labs was based, Interpol has now got involved in the search for him. According to rumours, Do Kwon may be in Serbia or another related country.

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The US Securities and Exchange Commission’s action against the Terra creator has also sparked a strong reaction in the cryptocurrency community. Many commentators are not defending Kwon as they see him as responsible for billions of dollars in losses. However, they also don’t like the manner in which the Securities and Exchange Commission has launched its campaign against Kwon.

The fall of the Terra stabelcoin

Here’s what lawyer Mike Selig, who specialises in Web3-projects cases, writes on the matter.

The US Securities and Exchange Commission’s lawsuit against Terraform Labs and Do Kwon alleges that the Terra LUNA and UST ecosystem tokens are securities. According to this claim, the Commission characterises UST not only as an investment contract but also as a security because it can be exchanged for another security (LUNA). Under this theory, almost anything can be a security.

Terra creator Do Kwon

Alliance DAO General Counsel Mike Wawczak has also commented on what is happening. Here’s his quote, cited by Cointelegraph.

It is impossible to read the Commission’s lawsuit against Terraform Labs and not come to the conclusion that Chairman Gensler wants full discretion to apply securities laws to any transaction he wants. To that end, he has requested $2.2 billion in funding for 2023. By comparison, San Francisco’s budget last year was $13 billion.

Cryptocurrency scammers

Justin Browder, a partner at law firm Willkie Farr & Gallagher, compared the Commission’s description of using USTs for profit to “putting money in the bank”. By that logic, the agency could “pick on” any monetary instrument and try to impose its will on everyone, as if that instrument were a security.

Recognition of cryptocurrencies as a security significantly constrains industry development: in such a situation, startups would be under constant pressure from the US Securities and Exchange Commission. In addition, given what is happening, at some point the US may simply lose its status as a good place to develop crypto projects. In theory, Hong Kong, where cryptocurrency trading will become legal for all residents in the summer of 2023, will be able to attract entrepreneurs.

In this case, we believe that Do Kwon will no longer be able to escape a fair punishment. Even if Terra's founder continues to go into hiding, the SEC will be looking for him much more aggressively. Consequently, it will be much harder for him to do so.