SOUTH Korean prosecutors trying to build a case against Do Kwon over the US$60 billion wipeout of his crypto project made an eye-catching admission this month: the latest court decision seems to support his defence.
They made the comment after a judge rebuffed a request to detain a person linked to Kwon's collapsed Terraform Labs ecosystem. Part of the judge's reasoning was that it's debatable whether the individual had violated the nation's Capital Markets Act as prosecutors claim - a key charge Kwon also faces, and which he has rejected.
The development highlights disputes over whether the now-collapsed TerraUSD and Luna tokens Kwon created can be regulated as securities under an act developed for assets like stocks and bonds. South Korea, as in the US and elsewhere, has yet to implement a legal code for crypto to cement its status.
"Korean law allows for a more limited range of securities than in the US," said Kwon Ohoon, a lawyer at Cha & Kwon Law Offices in Seoul. There are six categories under the act and the question is whether the tokens from Terraform Labs fall into a group known as investment contracts, he said.
Investment contract securities, rare in South Korea, are defined as giving a contractual right to profits or liability for losses from a venture run by a third party. Kwon, the lawyer at Cha & Kwon, said the judge who denied the detention request appeared uncertain if the tokens qualify under this statute.
TerraUSD was a stablecoin that was meant to have a constant US$1 value via a complex mix of algorithms and trader incentives involving Luna, whose price was meant to go up as the Terraform Labs network became more valuable.
The edifice crashed in May, contributing to a US$2 trillion rout in digital assets. Lawyers for Luna investors filed complaints alleging Do Kwon had engaged in fraud and illegal fundraising. Prosecutors last month said Kwon and five others face arrest warrants on charges including breaching the capital-markets law.
Kwon's whereabouts subsequently became unclear but he has denied any wrongdoing or being on the run. Terraform Labs has said there's no reasonable basis for accusing Kwon of falling foul of capital markets legislation because Luna doesn't qualify as a security.
Whether securities law captures crypto is a question officials globally are asking about digital tokens. In the US, for instance, Securities & Exchange Commission chair Gary Gensler is trying to gain authority over the sector.
"The move to regulate cryptocurrencies through securities-related laws is a worldwide trend and South Korea is set to follow that path," said Kang Seong-hoo, the head of the Korea Digital Asset Service Provider Association and a former director general at South Korea's Finance Ministry.
The prosecutors office in Seoul said it's making its "best efforts" to investigate the case, adding "the fact there is a legal argument does not mean the investigation can't go on". Neither Kwon nor Terraform Labs immediately responded to requests for comment.
The abstruse debate over crypto's legal status aside, Kwon also faces other charges though the prosecutors' office hasn't specified exactly what they are. Some of the estimated 280,000 people in South Korea who bought Luna are also pushing for redress.
The Terraform Labs project blew up just as President Yoon Suk Yeol's administration took power in May and revived a financial investigation unit in the prosecutors' office that had been disbanded by the previous government.
The Terraform Labs turmoil was the "hottest topic at the time" and became the first case for a resuscitated team that was under the spotlight, said Kim Hyoung Joong, a professor at Korea University Graduate School of Information Security and chairman of the Korea Fintech Society.
"Kwon's case and the political context in Korea are intertwined," Kim said. BLOOMBERG