In brief
- The bar to prove fraud in the U.S. is a high one to clear.
- It's unclear for now if the behavior of Terra's founder was more than merely reckless.
The recent collapse of the stablecoin project known as Terra is one of the biggest catastrophes in the history of crypto, wiping out hundreds of billions of dollars. In response, crypto columnist David Z. Morris penned a provocative column likening Terra founder Do Kwon to Elizabeth Holmes, the Theranos founder who is awaiting a criminal sentence for fraud—a fate that Morris believes should befall Kwon.
That view is understandable. Like Holmes and her failed blood-testing startup, Kwon relentlessly hyped a project that was rotten under the hood, and responded to skeptics by lashing out with anger and bombast ("I don't debate the poor" is one of his more notorious lines). Even worse, Kwon's antics did not just soak wealthy investors—as was the case with Theranos—but thousands of ordinary people.
What Kwon did was very bad. But that doesn't necessarily mean it was against the law. People do terrible things every day—such as refusing to help a drowning puppy or behaving cruelly to a grandparent—but, for one reason or another, those acts are not considered to be criminal. And that could prove the case with Kwon.
According to Randall Eliason, a law professor and former prosecutor who specializes in white collar crime, any criminal case would have to show that Kwon committed fraud as opposed to engaging in reckless mismanagement—a task that is rarely easy.
"When hedge funds and others lose a lot of money, it doesn't mean there’s fraud. Prosecutors would need some evidence that it’s not a bad idea or spectacular failure," he said.
Compiling such evidence is a challenge, Eliason added, since perpetrators are unlikely to lay out their fraudulent scheme in something like an email.
"You don’t find emails like that very often. Instead, it's often an accumulation of things, and lots of circumstantial evidence," he said. "You’re not going to have a classic smoking gun."
He added that the reasons for a market catastrophe may seem obvious in hindsight, but not beforehand—a point that is underscored by the fact that no one went to prison for the many reckless decisions that led to the 2008 financial crisis.
This doesn't mean, of course, that Kwon will escape criminal prosecution in the U.S. The scale of the Terra collapse, along with the murky dealings surrounding efforts to bail out the UST stablecoin and its sister token LUNA, means that law enforcement is likely investigating, and could indeed turn up a smoking gun. There is also the matter of Terra's investment platform, Anchor, which promised 20% guaranteed returns—an offer that was so recklessly stupid as to least border on criminal.
At the very least, we can expect non-criminal regulatory agencies like the SEC to hit Kwon with all they've got in terms of fines and professional penalties. It's a safe bet that Kwon will be barred from any sort of enterprise related to securities in the U.S., and that he will avoid setting foot on American soil for the foreseeable future.
Meanwhile, even if U.S. prosecutors are unable to put together a criminal case, that may not be the case in Kwon's native South Korea where the Terra debacle has brought calls for government investigations and a flurry of civil lawsuits. One of the lawyers involved in those proceedings told a Korean news outlet that Kwon "may be punished for fraud if Terra's Anchor protocol is proved to be a Ponzi scheme."
Kwon's public relations firm declined to offer an immediate comment as to his potential exposure to criminal proceedings.
The bottom line is that, as with other people who do bad things, Kwon will suffer major damage to his reputation but, for now at least, does not appear likely to see a prison cell anytime soon.