The Seoul Southern District Prosecutor’s Office in Korea is looking into whether Ponzi scheme charges can be brought against Terraform Lab’s CEO, Do Kwon.
The Korean prosecutor’s office is investigating whether Terraform Labs co-founder Do Kwon ran a Ponzi scheme using the Anchor Protocol, a decentralised finance (DeFi) protocol that promises depositors up to 20% annual percentage return for staking Terra. According to the Korea Herald, “Kwon’s remarks promising returns could provide a key clue.”
A Ponzi scheme uses the money new people bring in to reward its existing or early investors. The Ponzi scheme fails when fresh investors’ funds run out. FTX CEO Sam Bankman-Fried recently explained how yield farming works like a Ponzi scheme.
Five Korean investors together decided on Thursday to file a class-action lawsuit against Kwon and co-founder Shin Hyun-Seong with law firm LKB & Partners. Terraform Labs failed to warn investors about the flaws in the algorithmic stablecoin Terra (UST), causing them to lose £0.8 million, according to the lawsuit claim. A provisional order to confiscate Kwon’s property was also submitted by six lawyers from LKB’s Capital Markets Law and Intellectual Property Teams.
As UST depegged earlier this month, some LKB employees lost money. The stability of TerraUSD rested on an algorithmic link with Luna, its sister token.
“There are related investors inside the law firm, and we plan to file a complaint against CEO Kwon at the Financial Investigation Unit of the Seoul Metropolitan Agency,” said Kim Hyeon-Kwon, one of the partners.
Following the UST catastrophe, Terraform’s legal staff resigned, and all its legal affairs are now handled by outside counsel.
Kwon, a 30-year-old Stanford alumnus who previously worked as a software engineer at Microsoft and Apple, started selling the Luna cryptocurrency to investors in 2018. Galaxy Digital, Lightspeed Venture Partners, and Pantera Capital were among the project’s early backers. Pantera Capital generated a 100-fold profit on its Luna holdings when it sold them last year, earning nearly £136 million on a £1.3 million investment.