Terra

CZ must stay, Do Kwon to be extradited: Law Decoded

A Seattle district court ruled out CZ’s departure to the UAE, and the Montenegrin justice minister plans to grant the United States request for Do Kwon’s extradition.

Binance founder Changpeng “CZ” Zhao has been ordered to stay in the United States until his sentencing in February 2024, with a federal judge determining there’s too much of a flight risk if the former exchange CEO is allowed to return to the United Arab Emirates. Seattle district court Judge Richard Jones wrote in his order:

“The defendant has enormous wealth and property abroad, and no ties to the United States […] His family resides in the UAE and it appears that he has favored status in the UAE. Under these circumstances, the Court finds that the defendant has not established by clear and convincing evidence that he is not likely to flee if he returns to the UAE.”

Jones accepted Zhao’s guilty plea to one count of Bank Secrecy Act violations, which the Binance founder submitted over two weeks ago on Nov. 21 alongside a $4.3 billion settlement with U.S. agencies. Now, the ex-CEO of Binance faces up to 18 months in prison.

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Montenegrin official plans to extradite Do Kwon to the United States: Report

The Terraform Labs co-founder had been awaiting extradition to either the U.S. or South Korea after being arrested and charged in Montenegro.

Terraform Labs co-founder Do Kwon will reportedly be extradited to the United States rather than South Korea to face criminal charges.

According to a Dec. 7 Wall Street Journal report citing people familiar with the matter, Justice Minister Andrej Milović in Montenegro plans to grant U.S. officials’ request for extradition. Kwon was arrested in Montenegro in March and sentenced to four months in prison for using falsified travel documents. He has also been charged in the U.S. and South Korea for his alleged role in the collapse of Terraform Labs.

Milović reportedly said the announcement would be made public “in a timely manner.” If extradited to the U.S., Kwon faces eight charges, including commodities fraud, securities fraud, wire fraud and conspiracy to defraud and engage in market manipulation related to his time at Terra. The U.S. Securities and Exchange Commission also charged Kwon with “defrauding investors in crypto schemes” in February.

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Jury in Terraform Labs case shouldn’t decide whether crypto is a security — SEC

According to the SEC, the tokens at issue in its civil case against Terraform Labs should be a “legal question” for a court, “not a factual question for the jury.”

Lawyers representing the United States Securities and Exchange Commission requested the judge in its civil case against Terraform Labs and co-founder Do Kwon determine whether certain crypto assets are securities rather than a jury.

In a Dec. District Court for the Southern District of New York, the SEC argued that the matter of cryptocurrencies as securities under the commission’s guidelines was a “legal question to be determined [by] the Court, not a factual question for the jury.” According to the SEC, sending the question of whether certain cryptocurrencies in the Terraform Labs case qualified as securities under the Howey test — the commission’s standard for determining what is a security — opened the matter up for discussion.

“There is no genuine dispute of material fact that Defendants’ crypto asset offerings involved an investment of money, in a common enterprise, with an expectation of profit to be derived from Defendants’ efforts,” said the SEC.

Source: Courtlistener

Related: SEC faces sanctions threat as Judge questions DEBT Box case accuracy

The SEC has taken it upon itself to label different cryptocurrencies as securities in various lawsuits, including enforcement actions against Binance and Coinbase. In the commission’s case against Ripple, a federal judge ruled in July that the XRP (XRP) token did not necessarily qualify as a security, potentially leading to the SEC dropping charges against CEO Brad Garlinghouse and executive chair Chris Larsen.

The question of what cryptocurrencies qualify as securities or commodities in the United States has been an ongoing debate among lawmakers and regulators, as has the role the SEC should play in regulating digital assets. Many experts are also speculating that the SEC may soon decide on whether to approve a spot crypto exchange-traded product for the first time.

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Terraform Labs and SEC lawyers spar over whistleblower in court: Report

Though many filings in the SEC case were made under seal, Judge Jed Rakoff reportedly suggested that nothing would remain confidential should the matter go to trial.

Lawyers representing the United States Securities and Exchange Commission and Terraform Labs and co-founder Do Kwon sparred in court over information provided by a whistleblower in the securities lawsuit.

According to a transcript of court events provided by Inner City Press on Nov. 30, the SEC reiterated its claims that Terra and Kwon “committed fraud” using the LUNA token, citing sealed evidence provided by an unnamed whistleblower.

“The SEC has misrepresented Do Kwon’s statements,” said Kwon’s and Terra’s lawyer, according to the report.

The arguments came in a hearing of the U.S. 28, the judge approved the confidential treatment of certain materials filed by Jump Crypto, the firm under scrutiny for its alleged involvement in the events leading to the depegging of UST.

Related: Do Kwon could serve prison in both US and South Korea, prosecutor says

Kwon, who was arrested by authorities in Montenegro in March for using falsified travel documents, could face extradition to either the U.S. Attorney’s Office charged Kwon with eight criminal counts related to fraud at Terraform Labs.

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Do Kwon lawyers reportedly dismiss SEC’s securities fraud allegation

Kwon’s lawyers claimed that the SEC failed to prove the alleged defrauding of US investors in connection with Terra’s $40 billion collapse of TerraUSD (UST) and Luna (LUNA).

The lawyers representing Terraform Labs co-founder Do Kwon reportedly argued in court against the allegations pressed by the US Securities and Exchange Commission (SEC). The federal agency had sued Kwon for allegedly defrauding US investors by illegally offering unregistered securities.

On April 21, Do Kwon’s lawyers asked the judge to dismiss the SEC lawsuit claiming that the regulator’s acquisitions were unfounded. While requesting to dismiss the lawsuit, Kwon’s lawyers asserted that US law prohibits regulators “from using federal securities law to assert jurisdiction over the digital assets in this case,” reported Bloomberg.

In addition, the lawyers claimed that the SEC failed to prove that Kwon had defrauded US investors in connection with Terra’s $40 billion collapse of the TerraUSD (UST) and Luna (LUNA) cryptocurrencies. According to the lawyers, the stablecoin at issue is a currency, not a security.

The legal proceedings began when Do Kwon was arrested in Podgorica airport, Montenegro on March 23, while attempting to fly to Dubai using fake documents. Following his arrest, both South Korean and American authorities requested the entrepreneur’s extradition.

At the time of writing, it remains unclear as to which country, if any, would be the most likely to be granted the extradition of Kwon.

Related: Do Kwon lawyers received $7 million before Terra collapse: Report

The Seoul Southern District Court recently denied an arrest warrant for Terraform Labs co-founder Shin Hyun-Seong.

While prosecutors saw Kwon’s arrest as an opportunity to pin down Shin, the court denied the request while citing unconfirmed allegations and the unlikeliness of Shin being a flight risk or destroying evidence.

“In the case when we receive several extradition requests, I would like to say that determining to which state they will be extradited is based on several factors like the severity of the committed criminal offense, the location and time when the criminal offense has been committed, the order in which we have received the request for extradition and several other factors,” said Montenegrin Justice Minister Marko Kovač through an interpreter.

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Do Kwon lawyers reportedly dismiss SEC‘s securities fraud allegation

Kwon’s lawyers claimed the SEC failed to prove he defrauded U.S. investors in connection with the $40 billion collapse of Terra’s TerraUSD and LUNA.

Lawyers representing Terraform Labs co-founder Do Kwon reportedly argued in court against the allegations of the United States Securities and Exchange Commission that Kwon defrauded U.S. investors by illegally offering unregistered securities.

On April 21, Kwon’s lawyers asked the judge to dismiss the SEC lawsuit, claiming that the regulator’s acquisitions were unfounded, according to a Bloomberg report. While requesting to dismiss the lawsuit, Kwon’s lawyers asserted that U.S. law prohibits regulators “from using federal securities law to assert jurisdiction over the digital assets in this case.”

In addition, the lawyers claimed the SEC failed to prove that Kwon had defrauded U.S. investors in connection with the $40 billion collapse of Terra’s TerraUSD (UST) and LUNA (LUNA). According to the lawyers, the UST stablecoin is a currency, not a security.

The legal proceedings began following Kwon’s arrested at the Podgorica airport in Montenegro on March 23 while allegedly attempting to fly to Dubai using fake documents. After his arrest, both South Korean and American authorities requested the entrepreneur’s extradition.

At the time of writing, it remains unclear which country, if any, will be granted their extradition request.

Related: Do Kwon lawyers received $7 million before Terra collapse: Report

“In the case when we receive several extradition requests, I would like to say that determining to which state they will be extradited is based on several factors like the severity of the committed criminal offense, the location and time when the criminal offense has been committed, the order in which we have received the request for extradition and several other factors,” said Montenegrin Justice Minister Marko Kovač through an interpreter on March 29.

The Seoul Southern District Court recently denied an arrest warrant for Terraform Labs co-founder Shin Hyun-Seong. While prosecutors saw Kwon’s arrest as an opportunity to pin down Shin, the court denied the request, citing the unconfirmed nature of the allegations and the unlikeliness of Shin being a flight risk or destroying evidence.

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Do Kwon lawyers received $7 million before Terra collapse: Report

While trying to tie in Kwon’s ill intent in prepaying the law firm, prosecutors believe that the information will help in the ongoing fraud case.

South Korean prosecutors confirmed that Terraform Labs CEO Do Kwon sent 9 billion won ($7 billion) to Kim & Chang — a top South Korean law firm — right before the spectacular collapse of the Terra ecosystem. 

Kwon’s decision to send millions to the law firm was flagged by prosecutors as a deliberate move, which allegedly reaffirmed his awareness of the impending collapse and anticipated expected legal problems, as reported by KBS News.

While trying to tie in Kwon’s ill intent in prepaying the law firm, prosecutors believe that the information will help in the ongoing fraud case. In addition, Kim & Chang’s lawyers visited Montenegro to meet with Kwon and Terraform’s former chief financial officer, Han Chang-joon.

Previously, Kwon was arrested at Podgorica airport in Montenegro after trying to fly to Dubai using fake documents. Following his arrest, both United States and South Korean authorities have sought Kwon’s extradition. However, the court is yet to decide.

Related: Terra co-founder in S.Korean crosshairs following Do Kwon arrest

On April 7, it was revealed that South Korean prosecutors suspected Kwon of converting illicit funds from Terra (LUNA) to Bitcoin (BTC). The prosecutors requested Binance to halt all withdrawal requests linked to Kwon.

In total, prosecutors identified 414.5 billion won ($314.2 million) in illicit assets associated with Terraform Labs co-founder Kwon and his associates, out of which about 91.4 billion won ($69 million) is reportedly directly linked to Kwon.

“We provided Korean LE authorities with the requested assistance. Since we cannot comment on ongoing LE investigations, for any further comment, please reach out to the prosecutors,” said a Binance spokesperson, speaking to Cointelegraph about the matter.

Magazine: US enforcement agencies are turning up the heat on crypto-related crime

Terra DeFi project Terraport suffers $2M hack days after launch

Terra users are losing another round of funds due to a breach on the new DeFi platform Terraport Finance, which launched on March 31.

The algorithmic stablecoin TerraUSD (UST) collapsed almost one year ago, but some Terra-related projects are still live and trying to overcome some issues.

Terraport Finance, a decentralized finance (DeFi) exchange project based on the Terra Classic blockchain, suffered a breach on its liquidity wallet on April 10. Announcing the news on Twitter, Terraport said the hacker had drained all liquidity pools from the platform, causing losses of about $2 million worth of digital assets.

“We are currently working with community members and major exchanges to secure as many of these funds as possible and blacklist wallets. All funds have been tracked,” Terraport stated.

According to social media reports, the Terraport hacker has allegedly transferred the stolen funds to exchanges Binance and MEXC Global. The investigators have urged the exchange’s security teams to freeze the assets as soon as possible.

While Terraport has been investigating the security issue and preparing an incident report, many online crypto enthusiasts have stood up to criticize the rushed launch of Terraport.

Following a token sale in February and March 2023, ​​TerraCVita launched its Terra Classic-based decentralized exchange, Terraport, on March 31. By April 7, Terraport burned nearly 100 million Luna Classic (LUNC) tokens in an attempt to revitalize Terra after it failed one year ago.

“What was for that hurry to launch to have two months presale?” one commentator called out on Twitter, stating that the answer to this question is the key to understanding the project’s driving force.

Some industry observers also alleged that Terraport went live without completing an audit, which triggered more complications.

The crypto community has also expressed outrage against influencers who have been involved in promoting Terraport before it suffered an exploit.

Related: DeFi exploits and access control hacks cost crypto investors billions in 2022: Report

According to LUNC enthusiast Levi Rietveld, some influencers like ClassyCrypto removed their LUNC-related promoting content soon after the platform was hacked. “Things are extremely fishy and its likely someone on the Terraport team rugged,” Rietveld stated.

Emerged largely in 2021, the DeFi industry continues to struggle in terms of security and infrastructure vulnerabilities, with new DeFi incidents coming up almost every day. One of the latest such incidents happened on April 8, with DeFi protocol SushiSwap losing more than $3 million due to a bug on the smart contract that aggregates trade liquidity.

Magazine: Asia Express: Zhu Su’s exchange did $13.64 in volume akshually, Huobi in crisis

Do Kwon converted illicit funds from LUNA to Bitcoin: S.Korean prosecutors

South Korean prosecutors have contacted Binance to request a halt on withdrawals linked to Do Kwon.

South Korean prosecutors have identified 414.5 billion won ($314.2 million) in illicit assets associated with Terraform Labs co-founder Do Kwon and his associates. Out of the identified illegal assets, prosecutors have linked about 91.4 billion won ($69 million) of the specified amount directly to Kwon.

Although Kwon amassed millions, none of the assets tied to him are recoverable or under the jurisdiction of the South Korean authorities. This is mainly because the now-arrested former CEO reportedly converted most of the illicit funds into Bitcoin (BTC) using overseas crypto exchanges instead of investing in physical assets, per a report published by local media outlet KBS.

Early investigation into the Terra collapse by the United States Securities and Exchange Commission revealed that Kwon siphoned nearly $100 million worth of Bitcoin from Terra post-collapse. In another report based on an SEC interview with former Terraform Labs, published in South Korean media, Kwon was accused of siphoning $80 million a month before the collapse of the Terra ecosystem.

The South Korean authorities have requested Binance to halt any withdrawal request associated with Kwon. Binance confirmed to Cointelegraph that they are cooperating with the prosecutors and offering any assistance they need. 

“We provided Korean LE authorities with the requested assistance. Since we cannot comment on ongoing LE investigations, for any further comment please reach out to the prosecutors.“

South Korean prosecutors are actively tracing properties associated with Terraform Labs executives to recover some illicit funds from the Terra debacle. On April 3, prosecutors seized homes and other assets to stop former Terra employees from selling things that might be tied to legal cases.

In addition to the residences in Seoul owned by former CEO Shin Hyun-seong and others, the prosecutors also filed foreclosure actions against their foreign-registered vehicles, lands in Hwaseong and Gapyeong in Gyeonggi-do, and Taean in South Chungcheong Province.

Related: Do Kwon faces fraud charges from US prosecutors hours after arrest

Terra was a booming crypto ecosystem until its $40 billion collapse in May 2022.

What was initially thought to be a market-triggered event turned out to be a clear case of fraud, with former CEO Kwon at the epicenter. According to on-chain data, In the 3 weeks leading up to the depeg of the TerraUSD (UST) stablecoin, one entity dumped over $450 million of UST on the open market. Four days after the last sale, UST started collapsing. The entity behind the massive dump was none other than Terraform Labs.

Despite an arrest warrant from South Korean authorities and an Interpol red notice against his name, Kwon continued to evade arrest for nearly a year before getting caught on March 23 in Montenegro.

Do algorithmic stablecoins have a future as centralized coins are under scrutiny?

Fiat stablecoins are too deeply rooted in exchanges for algorithmic stablecoins to rise, according to some experts.

Binance’s native stablecoin — Binance USD (BUSD) — was the third-largest stablecoin pegged to the United States dollar, minted by blockchain infrastructure platform, the Paxos Trust Company, through a transfer of technology agreement between the two firms. 

However, on Feb. 13, the New York Department of Financial Services ordered Paxos to stop minting any new BUSD tokens.

The move came just days after the United States Securities and Exchange Commission issued a Wells notice alleging BUSD violates securities laws.

Binance CEO Changpeng Zhao even predicted that regulatory clampdowns would force several other crypto businesses to move away from dollar-pegged stablecoins in the near future, and look for alternative tokens pegged to the euro or Japanese yen.

Zhao’s comments came during a Twitter AMA (ask me anything) session where he said that although gold is a good backing option, most people’s assets are in fiat currencies. He admitted that the U.S. dollar’s dominance in international markets makes it a go-to fiat currency, which is one of the main reasons behind the popularity of dollar-pegged stablecoins. However, regulatory action against such assets might make way for other stablecoins.

Zhao also talked about the role of algorithmic stablecoins, many of which are largely decentralized, and said that these types of stablecoins might play a more prominent role in the crypto ecosystem in the future but are inherently riskier than fiat-backed tokens.

Algorithmic stablecoins are not traditionally collateralized; instead, they use mathematical algorithms often linked to a tokenomics model rather than backed by a real-world asset like the U.S. dollar.

Most algorithmic stablecoin projects use a dual token system: a stablecoin and a volatile asset that maintains the stablecoin’s peg by maintaining the demand and supply system that keeps the stablecoin’s value unchanged. To mint a specific value of the stablecoin, an equal amount of the native token or volatile token is burned.

Following the regulatory action against BUSD, Binance turned to several alternative stablecoins, including a few decentralized ones, to fulfill its stablecoin-centered liquidity needs. From Feb. 16–24, Binance minted 180 million TrueUSD (TUSD) stablecoins.

Binance minted TrueUSD after BUSD’s ban. Source: Twitter

Decentralized stablecoins have a tainted past

Decentralized stablecoins were first popularized in the decentralized finance (DeFi) ecosystem with the creation of Dai (DAI) by MakerDAO. DAI maintains its peg through a smart contracts system governed by a decentralized autonomous organization (DAO). Although DAI has remained true to its decentralized values, it was caught up in the recent banking contagion that led to its depeg along with the Circle-issued USD Coin (USDC).

While algorithmic stablecoins stay true to the crypto ecosystem’s decentralized values, their real-life implementation has had a troubled history, especially with the collapse of the Terra ecosystem and its algorithmic stablecoin TerraUSD (UST), now called TerraClassicUSD (USTC).

Terra’s algorithmic stablecoin was once seen as the prime example of how a decentralized stablecoin could make it to the mainstream. However, after its depeg and subsequent ecosystem collapse, it has cast doubt on the future of such stablecoins.

Decentralized stablecoins suffered a heavy setback from the Terra saga, and the reputation of such stablecoins was tarnished further by the actions of Terraform Labs co-founder Do Kwon. Kwon evaded law enforcement agencies while maintaining that the debacle was not his fault, despite on-chain evidence suggesting the depeg was caused by one entity dumping over $450 million of UST on the open market. Kwon himself allegedly controlled that entity. He was recently arrested by Montenegrin authorities.

With centralized stablecoins under regulatory scrutiny and confidence in algorithmic stablecoins demolished, what does the future of a decentralized stablecoin look like? Is there a future at all?

Hassan Sheikh, the co-founder of the decentralized incubator platform DAO Maker, told Cointelegraph that a shift to decentralized stablecoins would not be in the form that people may expect. Centralized exchanges are highly vertically integrated, creating chains, wallets, staking solutions, mining ops and more.

“Any decentralized stablecoin to be adopted by exchanges is not yet on the market. It won’t be DAI or the like. The market caps aren’t significant enough to have the necessary network effect,” Sheikh said, adding, “Exchanges would be likely to fork off protocols like Maker and push for the traction of their controlled ‘decentralized’ stablecoin for that value capture. The decentralized stablecoin on exchanges wouldn’t be truly decentralized, and it most likely doesn’t exist yet, as the major ones would likely pursue their own.”

Talking about BUSD’s regulatory troubles, Sheikh said that it was merely the first test of people’s willingness to shift to a new exchange-issued stablecoin. If proven, the market will shift. Expecting a Binance version of DAI is reasonable, he added.

Sheikh also shed light on the major issues with decentralized stablecoins currently in the market. He said that the majority of these stablecoins are so deeply rooted in USDC that they’re hardly decentralized.

Many decentralized exchange pools and decentralized stablecoins, such as DAI and Frax (FRAX), have significant collateral exposure to USDC. This is why DAI issuer MakerDAO introduced an emergency proposal to address risks from its $3.1 billion USDC collateral exposure during the recent depeg.

If anything, “the aura of their marketing as decentralized is now wiped out with the recent struggles of USDC, which quickly eroded the peg of DAI. The switch to a decentralized stablecoin is too distant as the to-be dominant stablecoin doesn’t exist yet. Exchanges are supporting these purely for volume profits. The few BTC/DAI and similar pairs that do exist are so weak in an activity that the foreseeable future doesn’t show any sign of a shift to decentralized stables across major liquidity partners,” Sheikh said.

Crypto exchanges are integrated with fiat-backed stablecoins

Fiat-backed stablecoins have become a lifeline in today’s crypto world. In the early days of crypto exchanges, these stablecoins acted as an onboarding tool for many traders, and in the last decade, they have also become a key liquidity provider. 

“Fiat-backed stablecoins are so deeply rooted in exchanges that it’s highly unlikely to expect a mammoth shift despite the regulatory scrutiny.” Shiekh told Cointelgraph.

Abdul Rafay Gadit, the co-founder of crypto trading platform Zignaly, told Cointelegraph that despite the recent USDC depeg, crypto trading platforms still prefer U.S. dollar-pegged stablecoins.

“I personally believe that [Tether] USDT is the best stablecoin at this moment, carefully pegged 1:1 and kind of away from unfair regulations as well. USDC was unfortunate because of its ties to SVB [Silicon Valley Bank]; otherwise, they run a great business,” he said.

He told Cointelegraph that centralized stablecoins are lifelines to the crypto ecosystem, and despite the regulatory pressure, they will continue to be a dominant force.

Gadit said that exchanges might move away from the U.S., but fiat-backed stablecoin will continue to rule:

“BUSD action looks like victimization to me; I think it’s uncalled for and totally unfair. Going forward, stable issuers will try to stay away from the U.S., just like USDT issuer Tether operates out of Hong Kong.”

Tether (USDT) continues to dominate the stablecoin market despite ongoing regulatory scrutiny against many other U.S. dollar-pegged stablecoins. Industry experts believe that even though decentralized stablecoins look promising, their real-world implementations have been questionable. Thus, centralized stablecoins will likely continue to dominate the crypto market.