Author: FinTax
Do Kwon was once hailed as South Korea’s “cryptocurrency king.” However, following the collapse of UST and the subsequent legal charges, his name became associated with tax evasion and fraud. In May 2022, the National Tax Service of Korea(NTS) issued a tax fine of 100 billion KRW (approximately 78 million USD) to Do Kwon, co-founder and CEO of Terraform Labs. The company had already caught the attention of NTS in June 2021 for suspected tax evasion. Since his arrest in Montenegro, Do Kwon has been awaiting a final extradition decision. In this article, we will discuss the rise of this cryptocurrency tycoon and the Terraform Labs empire, as well as the enormous tax fines Do Kwon now faces.
1. The Background of the Do Kwon Case
1.1 The Rise of Do Kwon and Terraform Labs
Do Kwon was born in 1991 in Seoul, South Korea. He earned a bachelor’s degree in computer science from Stanford University in 2015 and briefly worked as a software engineer at Microsoft and Apple. However, he quickly grew disillusioned with the lack of ambition at large companies and decided to start his own venture. In January 2016, Kwon returned to South Korea and founded his own startup, Anyfi. However, the success of Anyfi is not the focus of this story. The real cryptocurrency legend began when Kwon, together with his university friend Nicholas Platias, started researching blockchain technology and eventually founded Terraform Labs. The vision of Terraform Labs was to create a new monetary system, specifically a decentralized stablecoin—Terra USD (UST). The creation of UST marked the rise of Do Kwon’s Terra empire, but in the early days, Kwon’s simple idea was to create the “most useful dollar.”
UST and LUNA were the core components of the Terra ecosystem. UST was an algorithmic stablecoin pegged to the value of the US dollar. When minting UST, users were required to burn an equivalent amount of LUNA (i.e., a 1:1 exchange). Similarly, to redeem LUNA, users needed to burn the corresponding amount of UST. This created an arbitrage opportunity between LUNA and UST, allowing traders to burn and mint them based on price deviations from 1 USD, thus ensuring UST’s price stability through supply-demand relations and incentives. This also meant that UST had no external collateral backing, unlike Tether, USDC, or DAI, which are backed by fiat currencies or on-chain assets.
1.2 The Collapse of UST and Do Kwon’s Flight
In theory, the mechanism between LUNA and UST should have been able to handle market fluctuations. However, reality is often more complex and harsh. In 2022, the collapse of the Terra ecosystem occurred because this mechanism failed to stabilize the price of UST amid market panic. As whales began to sell off UST and the market’s demand for UST sharply decreased, its price started to decouple from the dollar. The system failed to adjust the supply of LUNA in time, leading to a rapid drop in the price of LUNA, which in turn caused a death spiral for both LUNA and UST. This triggered a massive crash in the cryptocurrency market, with LUNA plummeting from a historical high of $119.51 to nearly zero, losing around $45 billion in market value within a week. In South Korea alone, approximately 200,000 investors suffered substantial losses or even bankruptcy. This unexpected collapse not only destroyed the once-thriving UST but also sent Do Kwon’s empire into a tailspin.
Following the collapse of UST, Do Kwon went on the run for 10 months. During this time, South Korean prosecutors issued an arrest warrant for him in September 2022, and Interpol issued a red notice. On March 23, 2023, Montenegrin police arrested Do Kwon at an airport for using falsified documents. After the news broke, U.S. federal prosecutors quickly charged him with fraud, including conspiracy to commit fraud, commodities fraud, securities fraud, wire fraud, and market manipulation. The U.S. Department of Justice requested that Montenegro extradite him to the U.S. Additionally, South Korea and Singapore, which also have legal jurisdiction, made extradition requests. As of now, although the Montenegrin court has yet to make a final decision, it seems most likely that Do Kwon will be tried in South Korea.
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2. Do Kwon’s Tax Evasion Charges and Potential Legal Liabilities
In addition to charges of fraud, Do Kwon and Terraform Labs are facing significant tax evasion accusations. In June 2021, the National Tax Service of Korea (NTS) launched a special tax investigation into Terraform Labs’ parent company, The Ancore Company, and Terraform Labs itself for suspected tax evasion. During the investigation, the NTS discovered that Do Kwon owned 92% of the shares in Terraform Labs’ Singapore-based entity, Terra Singapore. It was revealed that this Singapore company had secretly transferred large profits to the British Virgin Islands (BVI), exploiting BVI’s lenient tax policies to avoid taxes. As the largest shareholder, Do Kwon was naturally the primary beneficiary of this tax evasion scheme. This type of tax avoidance strategy is not unusual, as Samsung Electronics’ Vice Chairman Lee Jae-yong was also summoned by South Korean prosecutors in 2021 for setting up a shell company in the BVI to shift profits, a tactic that has been a target of South Korean authorities.
The first step in determining tax evasion is to establish jurisdiction. In Do Kwon’s case, despite Terraform Labs being registered abroad, the company was essentially conducting cryptocurrency operations in South Korea, meaning it should have paid taxes there. South Korea’s criteria for tax evasion align closely with international standards. The first criterion is whether there has been a tax evasion act, such as failing to report or underreporting income, assets, or other taxable items. The second criterion is that the taxpayer is aware of their efforts to reduce or avoid taxes and intentionally engages in tax evasion, rather than it being due to negligence or misunderstanding. The third is that the evaded amount exceeds a certain threshold. According to the details disclosed, Do Kwon was aware of the company’s tax arrangements and shareholding structure. While South Korea does not specify a precise amount for tax evasion charges, the amount involved in Do Kwon’s case is substantial. If the prosecution can provide sufficient evidence, it is almost certain that Do Kwon will be convicted of tax evasion, which would lead to a lengthy prison sentence and a massive tax fine of approximately 100 billion Korean Won. If the charges of financial fraud are also proven, Do Kwon could not only lose all his wealth but also spend his prime years behind bars.
3. Reflections on Do Kwon’s Tax Evasion Case: From Cryptocurrency King to Prisoner
The Do Kwon case has acted like a bombshell in the world of cryptocurrency, triggering deep reflections within the industry, particularly regarding the regulation of crypto assets and tax compliance. One increasingly prominent contradiction is that while the cryptocurrency industry has been thriving and growing exponentially, even through multiple market cycles, generating unprecedented wealth, governments and regulatory bodies continue to apply traditional, relatively mature rules to try to bring the industry under their control. While governments’ regulatory efforts may be motivated by concerns for financial order and economic stability, they risk stifling the normal development of the cryptocurrency sector. As former President Trump criticized the U.S. SEC’s former Chairman Gary Gensler, the SEC’s strict regulations may have contributed to the U.S. losing its competitive edge in the global cryptocurrency and blockchain industry. Perhaps the most effective approach for new technologies is to observe and intervene cautiously.
From the perspective of tax collection, countries’ tax rules for crypto assets remain unclear and inconsistent. The constant innovation in the crypto space further complicates the application of these rules, which in turn increases the tax burden on the industry. A transparent and stable tax framework tailored to the unique characteristics of the cryptocurrency industry is urgently needed. In fact, Do Kwon himself was dissatisfied with South Korea’s tax system, feeling that the tax burden was too heavy. In comparison, moving profits and wealth to the BVI, known for its zero tax rate, seemed like a more economical choice. However, Do Kwon overestimated his ability to evade taxes and the level of scrutiny from international tax authorities. In other words, regardless of whether UST collapsed, Do Kwon was bound to face tax investigations. The collapse of UST merely accelerated the arrival of tax evasion charges. In a sense, cryptocurrency assets, for Do Kwon and many other crypto billionaires, were not just symbols of wealth and status but also potential constraints. Once they decide to evade taxes or break other regulations, these constraints become real shackles.
Despite the imperfect tax rules for crypto assets, we must still focus on current tax compliance issues to avoid unnecessary penalties and losses before the rules change. To ensure compliance and avoid tax risks, investors in the crypto sector should consider the following:
- Improve Internal Tax Management Systems : For cryptocurrency businesses, it is essential to establish a comprehensive, systematic, and rigorous tax management framework. From the issuance and distribution of tokens to the accounting of business revenues and the monitoring of cross-border funds, every aspect should be considered in tax compliance. Through robust internal management systems and auditing mechanisms, businesses can ensure the accuracy and completeness of tax information and effectively prevent potential tax risks.
- Stay Alert to Policy Changes and Adjust Strategies : The cryptocurrency industry is still in its early stages, with frequent changes in tax policies and significant differences between jurisdictions. Investors and businesses must closely monitor policy changes in cryptocurrency taxation by governments and international organizations, staying informed about the latest regulatory trends and legal updates.
- Leverage Professional Expertise to Enhance Compliance : The tax issues related to cryptocurrency assets are highly specialized and complex. Seeking help from professionals familiar with crypto tax laws, such as lawyers, accountants, or tax advisors, is a wise move. These experts can provide accurate tax consulting services, craft personalized compliance plans based on the individual or business’s situation, identify potential tax risks, and suggest effective countermeasures. Additionally, utilizing specialized crypto tax reporting software can help manage complex transaction data efficiently and accurately, significantly improving the efficiency and accuracy of tax filings, while reducing the risk of human error leading to tax penalties.
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