Terra chief faces arrest as S. Korea ramps up global manhunt

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In this issue

  1. Do Kwon: Where­abouts unknown
  2. The Merge: A high, then a hangover
  3. e‑CNY: Can­ber­ra calling

From the Editor’s Desk

Dear Read­er,

“Fight or flight” is a threat response hard-wired into our psy­cho­log­i­cal make-up before our ances­tors even learned to make fire. Today, it has a very mod­ern appli­ca­tion — in crypto. 

Flight is some­thing in which Ter­raform Labs chief exec­u­tive Do Kwon — to give him his full name, Kwon Do-hyung — appears to be engaged, hav­ing skipped his native South Korea for Sin­ga­pore before the net of law enforce­ment began to close around him and the US$37 bil­lion col­lapse of his Ter­ra-LUNA cryp­tocur­ren­cy project.

Sin­ga­pore police claim Mr. Kwon is not in the city-state, which begs the ques­tion: Well, where then is he? as author­i­ties in his home coun­try await a response to their request for an inter­na­tion­al arrest war­rant for him.

A big­ger sto­ry is the fight that is com­ing on the oth­er side of the Pacif­ic, in the Unit­ed States, where, fol­low­ing the Ethereum network’s Merge last week, Secu­ri­ties and Exchange Com­mis­sion Chair Gary Gensler appeared to set the stage for more cryp­tocur­ren­cies — notably all those mint­ed using Ethereum’s new proof-of-stake con­sen­sus — to be treat­ed as securities.

The fight against secu­ri­ties clas­si­fi­ca­tion already has a high-pro­file com­bat­ant in the form of Rip­ple Labs, which has been grap­pling with the SEC for two years over the regulator’s accu­sa­tion that the pay­ments com­pa­ny sold US$1.3 bil­lion of unreg­is­tered secu­ri­ties in the form of XRP tokens. But Gensler’s com­ments have impli­ca­tions for the cryp­to indus­try that go far beyond just Rip­ple, sub­ject­ing an increas­ing num­ber of tokens to its scrutiny.

How this will play out will be front and cen­ter in the minds of the cryp­to com­mu­ni­ty as we inch clos­er to the U.S. mid-term elec­tions this autumn and relat­ed pol­i­cy devel­op­ments that fol­low in 2023. 

Until the next time,

Ang­ie Lau,
Founder and Edi­tor-in-Chief
Forkast


1. Cash me if you can

Image of Do Kwon layered in front of South Korean flag
As South Korea seeks Interpol’s help to bring Terraform’s Do Kwon back to face author­i­ties in his home coun­try, he says his where­abouts are nobody’s busi­ness but his own. Image: Woohae Cho/Bloomberg

By the num­bers: Where is Do Kwon? — over 5,000% increase in Google search volume.

Wher­ev­er Ter­raform Labs Chief Exec­u­tive Kwon Do-hyung — bet­ter known as Do Kwon — is cur­rent­ly locat­ed, he faces the risk of being deemed an ille­gal alien, as South Korea has start­ed the process of can­cel­ing his pass­port. Pros­e­cu­tors in Seoul have report­ed­ly asked Inter­pol to issue a red notice — an inter­na­tion­al request for law enforce­ment agen­cies in Interpol’s 195 mem­ber nations to arrest and detain a sus­pect in a crim­i­nal case — for Kwon.

  • South Kore­an author­i­ties issued an arrest war­rant for Kwon, the cre­ator of the col­lapsed algo­rith­mic sta­ble­coin UST and its sis­ter Luna coin (now renamed Luna Clas­sic), for alleged vio­la­tions of domes­tic cap­i­tal mar­kets laws. Five oth­er peo­ple are also on the want­ed list along­side Kwon, accord­ing to Bloomberg.
  • South Korea has been prob­ing Kwon and Ter­raform Labs for sus­pect­ed fraud fol­low­ing the multi­bil­lion-dol­lar col­lapse of the Ter­ra ecosys­tem in May. Many investors lost large sums of mon­ey from Terra’s implo­sion, and some saw their life sav­ings disappear.
  • Terra’s death spi­ral trig­gered a series of insol­ven­cies and bank­rupt­cies in the cryp­to indus­try as coin prices plum­met­ed, lop­ping more than a tril­lion dol­lars off the over­all cryp­to mar­ket cap.
  • Kwon was wide­ly believed to be in Sin­ga­pore, and a video inter­view released last month appeared to con­firm his location.
  • But over the week­end, Sin­ga­pore police said Kwon was not cur­rent­ly in the city-state.
  • “I am not ‘on the run’ or any­thing sim­i­lar — for any gov­ern­ment agency that has shown inter­est to com­mu­ni­cate, we are in full coop­er­a­tion and we don’t have any­thing to hide,” Kwon said on Twit­ter while defend­ing his pri­va­cy. South Kore­an pros­e­cu­tors dis­pute Kwon’s claims.
  • A Ter­raform Labs spokesper­son declined to com­ment on the charges Kwon faces, and Kwon has not respond­ed to Forkast’s requests for comment.

Forkast.Insights | What does it mean?

South Kore­an author­i­ties have shift­ed up a gear in their inves­ti­ga­tion of sus­pect­ed fraud relat­ed to the Ter­ra-LUNA crash, mov­ing to can­cel Kwon’s pass­port and seek­ing to enlist Inter­pol in bring­ing him back with­in their reach. 

The process of void­ing Kwon’s trav­el doc­u­ment is being han­dled by the Min­istry of For­eign Affairs and can take from one week to a month, Dong­guk Uni­ver­si­ty Pro­fes­sor of Infor­ma­tion Secu­ri­ty Hwang Suk-jin told Forkast.  

If Kwon’s pass­port is can­celed, any visa or entry per­mit that he holds based on that doc­u­ment will be inval­i­dat­ed — unless he is trav­el­ing on a sec­ond pass­port, cer­tain nation­al­i­ties of which can be pur­chased with rel­a­tive ease. 

Out of the ash­es of Terra’s col­lapse, Kwon has led the cre­ation of Ter­ra 2.0, a new, scaled-down incar­na­tion of the Ter­ra blockchain that no longer uses the UST sta­ble­coin, which is now renamed USTC. 

Terra’s orig­i­nal blockchain, now known as Ter­ra Clas­sic, will be imple­ment­ing a 1.2% tax burn on Luna Clas­sic (LUNC) and USTC trans­ac­tions start­ing on Sept. 22 in Asia. 

The mech­a­nism is a vari­a­tion of a com­mu­ni­ty pro­pos­al to burn some of the sup­ply of the cryp­tocur­ren­cy to help pre­serve its val­ue — a plan that was dis­missed by Kwon and Ter­raform Labs in favor of a hard reset through the cre­ation of Ter­ra 2.0.

Back in its pre-crash incar­na­tion when it was called Luna, LUNC was a top-10 cryp­tocur­ren­cy by mar­ket cap­i­tal­iza­tion. But it fell out of the top 100 fol­low­ing its crash in May. The cryp­to has regained ground to become the 33rd-largest token by mar­ket cap, see­ing 225% gains in the past 30 days that have led to the token burn set to begin this week. 

Luna 2.0 was the world’s 94th-largest cryp­tocur­ren­cy by mar­ket cap as of press time. 

South Korea’s man­hunt for Kwon may fur­ther damp­en investors’ appetite for the new coin. 


2. Merge, no surge

Logo of Ethereum
The cryp­to mar­ket boost fol­low­ing Ethereum’s much-antic­i­pat­ed Merge was short-lived, and some tokens cre­at­ed by the network’s forks are see­ing big loss­es. Image: Enva­to Elements

By the num­bers: The Merge Ethereum — over 5,000% increase in Google search volume.

The cryp­to indus­try cel­e­brat­ed the suc­cess of Ethereum’s Merge last week as the net­work com­plet­ed its tran­si­tion to a proof-of-stake (PoS) con­sen­sus mech­a­nism and phased out its ener­gy-inten­sive proof-of-work (PoW) system. 

  • This week start­ed with a major headache for the cryp­to mar­ket, with Ethereum falling below US$1,300 on Mon­day for the first time since July. The token was trad­ing at US$1,330 as of mid-week Asia time.
  • Bit­coin also dipped below US$18,500, its low­est lev­el since June. BTC has since crept up to US$18,900.
  • Ethereum forks, dri­ven by min­ers to pre­serve their PoW way of doing busi­ness, have also faced tech­ni­cal issues at launch, with coins that have sprung up, such as Ethereum­Fair, hav­ing lost as much as 88% of their val­ue since the Merge.
  • Oth­er lead­ing alt­coins that use PoS, such as Car­dano, Solana and Polka­dot, were among the biggest losers at the begin­ning of the week.
  • Cryp­to investors are tread­ing water this week as the U.S. Fed­er­al Reserve is expect­ed to announce anoth­er 75 basis point inter­est rate increase dur­ing the wee hours on Thurs­day in Asia, or Wednes­day after­noon in the U.S.
  • CME Group mar­ket ana­lysts ini­tial­ly pre­dict­ed a 40% chance that the Fed would opt for a more dras­tic full 1% hike after August infla­tion data exceed­ed expec­ta­tions. The ana­lysts have since low­ered that fore­cast to 18%.
  • Fed Chair Jerome Pow­ell has pledged to bring U.S. infla­tion back down to 2%. Econ­o­mists expect the cen­tral bank to raise inter­est rates to 4% with­in the year to tame spi­ral­ing inflation. 

Forkast.Insights | What does it mean?

Ethereum’s smooth and suc­cess­ful upgrade last week — a long-antic­i­pat­ed event intend­ed to increase the network’s scal­a­bil­i­ty and great­ly reduce its car­bon foot­print — had the indus­try in an ebul­lient mood for a few days. But fears of the U.S. Fed­er­al Reserve’s third suc­ces­sive 75 basis point inter­est rate increase have brought the mar­ket swift­ly back to the real­i­ty of surg­ing inflation. 

Although the mar­ket remains focused on the Fed, the U.S. Secu­ri­ties and Exchange Com­mis­sion (SEC) is also attract­ing attention. 

Fol­low­ing Ethereum’s Merge, SEC Chair Gary Gensler stat­ed that PoS-based cryp­tocur­ren­cies were capa­ble of pass­ing the Howey test, which deter­mines whether a trans­ac­tion qual­i­fies as an invest­ment con­tract and is there­fore a secu­ri­ty. That bench­mark would place such assets under U.S. secu­ri­ties laws. 

Gensler’s com­ments raise the stakes in the SEC’s ongo­ing court bat­tle against Rip­ple Labs.

Rip­ple and the secu­ri­ties watch­dog have been butting heads in court since Decem­ber 2020 over whether the com­pa­ny sold US$1.3 bil­lion worth of unreg­is­tered secu­ri­ties in the form of XRP crypto. 

In a fil­ing over the week­end, the SEC argued that Rip­ple Labs had not dis­put­ed that its XRP sales had involved exchanges of “mon­ey,” thus meet­ing the “invest­ment of mon­ey” qual­i­fi­ca­tion of the Howey test. 

Rip­ple hit back in its own fil­ing the same day, say­ing: “Rip­ple had and has no con­tract at all with many XRP recip­i­ents and was not even involved with most XRP trad­ing in the sec­ondary market.”

Who knew that the trib­al­ly loy­al Ethereum and XRP com­mu­ni­ties would one day be mak­ing com­mon cause?


3. Aussie rules

Australian Senator Andrew Bragg in front of translucent Australian flag on top of the Chinese yuan sign.
Aus­tralian Sen­a­tor Andrew Bragg says future use of the dig­i­tal yuan by banks in Aus­tralia could under­mine Australia’s nation­al secu­ri­ty. Image: Enva­to Elements

Aus­tralian Sen­a­tor Andrew Bragg — one of the nation’s most cryp­to-lit­er­ate law­mak­ers — has a bill in the works to mon­i­tor Chi­nese banks oper­at­ing Down Under and their future use of China’s cen­tral bank dig­i­tal cur­ren­cy (CBDC), which he claims could be a threat to Australia’s nation­al secu­ri­ty

  • The dig­i­tal yuan, known offi­cial­ly as e‑CNY, is the most advanced CBDC project oper­at­ing in a major econ­o­my. While the Unit­ed States has been hes­i­tat­ing on the issuance of a dig­i­tal dol­lar, tri­als of Beijing’s CBDC — which has been in devel­op­ment for over sev­en years — have expand­ed to 23 Chi­nese cities and regions.
  • “[E‑CNY] cur­ren­cy, if it became wide­spread in the Pacif­ic, or even with­in Aus­tralia, would give the Chi­nese state enor­mous pow­er — eco­nom­ic and strate­gic pow­er that it doesn’t have today,” Bragg said on local radio this week. “So, I think we need to be pre­pared for that. We need to know more about this dig­i­tal cur­ren­cy, so the [pro­posed Dig­i­tal Assets (Mar­kets Reg­u­la­tion) Bill] estab­lish­es report­ing require­ments in that regard.”
  • The Aussie cryp­to advo­cate said he plans to intro­duce the Dig­i­tal Assets Bill dur­ing parliament’s next sit­ting at the end of the month.
  • Chi­na is Australia’s largest trad­ing part­ner, but the rela­tion­ship between the two nations has soured as Bei­jing imposed bans and sanc­tions on Aus­tralian exports in response to Canberra’s call for an inde­pen­dent probe into the ori­gins of Covid-19.
  • China’s grow­ing influ­ence in the Asia-Pacif­ic region has also been a cause for con­cern in Can­ber­ra. Ear­li­er this year, Chi­na signed a secu­ri­ty pact with the Solomon Islands that would allow Bei­jing to estab­lish a mil­i­tary base in the coun­try, which neigh­bors Australia. 

Forkast.Insights | What does it mean?

Sen­a­tor Bragg’s nation­al secu­ri­ty con­cerns relat­ed to e‑CNY come as Chi­na, cit­ing its need to stem mon­ey laun­der­ing, has made it clear that com­plete anonymi­ty will nev­er be a fea­ture of its CBDC. 

Although Chi­na does not yet have a spe­cif­ic law for the dig­i­tal yuan, offi­cials at the nation’s cen­tral bank say that e‑CNY wal­lets hold­ing high­er bal­ances and engag­ing in larg­er trans­ac­tions will go through a know-your-cus­tomer process to sup­port what the cen­tral bank calls “man­aged anonymi­ty.” 

Chi­na watch­ers are also pay­ing close atten­tion to e‑CNY tests in Hong Kong, as the city’s glob­al con­nec­tions and ties with the Chi­nese main­land make it a nat­ur­al test­bed for the cross-bor­der use of the dig­i­tal yuan. Howard Lee, deputy chief exec­u­tive of the Hong Kong Mon­e­tary Author­i­ty, the city’s de fac­to cen­tral bank, said ear­li­er this month that it had made progress in the sec­ond phase of e‑CNY test­ing in Hong Kong, which involved the exist­ing Faster Pay­ment Sys­tem, an instant cross-bank pay­ment tool using the Hong Kong dol­lar and the Chi­nese yuan.

Mean­while, Chi­na is aggres­sive­ly dri­ving domes­tic e‑CNY adop­tion. Fan Yifei, a deputy gov­er­nor of the People’s Bank of Chi­na, said this week that the cen­tral bank planned to expand dig­i­tal yuan pilots on a province-wide lev­el to Guang­dong, Jiang­su, Hebei and Sichuan with­in the year. That means Chi­na could soon have almost 40% of its pop­u­la­tion using its new dig­i­tal cur­ren­cy, accord­ing to Forkast cal­cu­la­tions based on pub­licly avail­able information.

China’s e‑CNY is the most advanced CBDC in a major econ­o­my under­go­ing test­ing any­where, and as Wash­ing­ton-based think tank the Atlantic Coun­cil has point­ed out, Bei­jing is also keen­ly inter­est­ed in its cross-bor­der uses — which posi­tions Chi­na for set­ting future glob­al stan­dards for CBDC development. 

Australia’s leg­isla­tive ini­tia­tive to keep a close watch on Chi­nese banks’ e‑CNY uses is like­ly just the begin­ning of such moves by coun­tries wary of China’s glob­al influ­ence, which may soon be giv­en addi­tion­al momen­tum by the inter­na­tion­al use of the dig­i­tal yuan.



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