This article will discuss the former cryptocurrency tycoon and the once-glorious Terraform Labs empire, as well as the massive tax penalties that Do Kwon faces.

Written by: TaxDAO

Do Kwon was once hailed as the "King of Cryptocurrency" in South Korea. However, following the collapse of UST and the ensuing legal charges, this name has become associated with tax evasion and fraud. In May 2022, the Korean National Tax Service issued a tax bill of 100 billion won (approximately 78 million USD) to Do Kwon, co-founder and CEO of Terraform Labs. Earlier, in June 2021, Terraform Labs had already attracted the attention of the Korean tax authorities for suspected tax evasion. Since his arrest in Montenegro, Do Kwon has been awaiting a final extradition decision. FinTax will discuss this former cryptocurrency tycoon, the once-glorious Terraform Labs empire, and the massive tax penalties that Do Kwon faces.

1. The Background of the Do Kwon Case

1.1 The Glory of Do Kwon and the Rise of Terraform Labs

Do Kwon was born in Seoul, South Korea, in 1991. He graduated with a Bachelor’s degree in Computer Science from Stanford University in 2015 and briefly worked as a software engineer at Microsoft and Apple. However, after a short time, Do Kwon became disillusioned with the lack of "ambition" in large companies and decided to start his own venture. In January 2016, Kwon returned to South Korea to develop and decided to establish his startup, Anyfi. However, the success of Anyfi is not the story we are discussing today; a true crypto legend began when he and his college friend Nicholas Platias started researching blockchain technology and ultimately decided to found Terraform Labs. The vision of Terraform Labs was to create a new type of monetary system, specifically a decentralized stablecoin—Terra USD (UST). The birth of UST marked the rise of Do Kwon's Terra empire, but at that time, Do Kwon harbored a simple idea: to create "the most useful dollar possible."

UST and LUNA are the core components of the Terra ecosystem. UST is an algorithmic stablecoin pegged to the value of the US dollar. When minting UST, users need to destroy an equivalent amount of LUNA (i.e., a 1:1 exchange); similarly, when redeeming LUNA, users must destroy the corresponding amount of UST. At this point, there is an arbitrage opportunity between LUNA and UST, allowing traders to destroy and mint based on incentives when the price of UST or LUNA deviates from 1 USD, thus ensuring the stability of UST's price through price-supply-demand relationships. This also means that UST does not have external asset collateral support but maintains its price stability through market supply and demand and incentive mechanisms, which is the biggest difference between UST and Tether, USDC, or DAI: UST is not backed by fiat currency or on-chain assets.

1.2 The Collapse of UST and Do Kwon's Flight

In theory, the mechanism between LUNA and UST should be able to cope with various market fluctuations, but reality is often more complex and brutal. In 2022, the collapse of the Terra ecosystem was due to this mechanism's failure to effectively stabilize UST's price during market panic. As whales sold off UST and the market's supply of UST drastically exceeded demand, UST's price began to decouple, but the system could not timely adjust the supply of LUNA, leading to a sharp decline in LUNA's price, making it impossible to buy back enough UST with LUNA to keep the latter pegged to the dollar. Ultimately, LUNA and UST spiraled into a dual collapse, triggering a crash in the cryptocurrency market, with LUNA plummeting from a historical high of $119.51 to nearly zero, losing about $45 billion in market value within a week. In South Korea alone, approximately 200,000 investors suffered massive losses or even bankruptcy. This unexpected collapse not only destroyed the once-thriving UST but also left Do Kwon's empire on the brink of collapse.

With the collapse of UST, Do Kwon began a 10-month life on the run. During this time, Korean prosecutors issued an arrest warrant for him in September 2022, and Interpol also issued a red notice. On March 23, 2023, Montenegrin police detained Do Kwon at the airport for using forged documents. Upon learning of this news, federal prosecutors in New York quickly charged him with fraud, including conspiracy to commit fraud, commodity fraud, securities fraud, wire fraud, and conspiracy to manipulate the market. The U.S. Department of Justice requested Montenegro to extradite him to the United States. Additionally, South Korea and Singapore, which have legal jurisdiction, also made extradition requests. Currently, although the Montenegrin court has not made a final decision, it seems most likely that Do Kwon will face trial in South Korea.

2. Do Kwon's Tax Evasion Charges and Potential Legal Liabilities

In addition to fraud charges, Do Kwon and Terraform Labs also face massive tax evasion allegations. In June 2021, the Korean National Tax Service launched a special tax investigation into Terraform Labs' parent company, The Ancore Company, and Terraform Labs for suspected tax evasion. During the tax investigation, the Korean National Tax Service discovered that Do Kwon held 92% of the shares in Terra Singapore, the Singapore entity of Terraform Labs. It was verified that this Singapore company secretly transferred a large amount of profit to the British Virgin Islands (BVI) to take advantage of BVI's lenient tax policies for tax evasion, and as the largest shareholder, Do Kwon was naturally the biggest beneficiary of this tax evasion. This tax avoidance strategy is not uncommon; Lee Jae-yong, vice chairman of Samsung Electronics, was summoned by Korean prosecutors in 2021 for setting up a shell company in the BVI to transfer profits, and such overseas tax evasion behaviors have been a key target for the Korean government.

The first step in determining tax evasion should be to clarify jurisdiction. In the Do Kwon case, although Do Kwon designed the corporate equity structure to transfer most of the profits from cryptocurrency assets to the BVI company, significantly reducing the actual tax burden, according to the actual operation principles adopted by Korea, the companies controlled by Do Kwon, although registered outside Korea, are essentially still engaged in cryptocurrency asset operations within Korea and should therefore pay relevant taxes in Korea.

Korea's standards for determining tax evasion are relatively close to those commonly used in other countries. The first point is to determine whether there is tax evasion behavior, i.e., failing to report or underreporting income, property, or other taxable items; the second point is that the taxpayer knows they are reducing or evading taxes and intends to do so, as tax evasion is generally not due to negligence, misunderstanding, or unconscious behavior; the third point is reaching a certain monetary threshold. According to the details disclosed in the case, Do Kwon was aware of the corporate equity structure and tax arrangements, and although Korea does not explicitly specify a monetary threshold for tax evasion, the amount of tax evasion attributed to Do Kwon is significant. Therefore, if the Korean prosecutors can present legal and sufficient factual evidence, it is almost inevitable that Do Kwon will be convicted of tax evasion, which means he will face a long prison sentence and be subject to a massive tax penalty of about 100 billion won. If the charges of financial fraud are also upheld, then Do Kwon will not only face bankruptcy but will also spend the most productive years of his life in prison.

3. Reflection on Do Kwon's Tax Evasion Case: From King of Cryptocurrency to Prisoner

In the world of cryptocurrency, the Do Kwon incident is like a bombshell, triggering profound reflections within the crypto industry regarding the regulation of crypto assets, especially tax compliance regulation. An increasingly prominent contradiction is that, on one hand, the cryptocurrency industry is vibrant, experiencing geometric growth through bull and bear cycles, generating a wealth effect that is rare in human history; on the other hand, governments and regulatory agencies possess a relatively mature but traditional set of regulatory rules, attempting to bring the cryptocurrency industry under their control. In the face of this emerging phenomenon of crypto assets, the regulatory measures taken by governments certainly consider maintaining financial order and economic stability, but they may also hinder the normal development of the cryptocurrency industry. As Trump criticized former SEC Chairman Gary Gensler, the SEC's past strict regulatory measures may have caused the U.S. to lose its competitiveness in the global cryptocurrency and blockchain arena. Perhaps for a new phenomenon, the most effective assistance is to observe its changes and intervene cautiously.

From the perspective of tax administration, the tax rules for crypto assets in various countries are not clear and explicit enough, and the continuous innovations in the crypto asset field further obscure the applicability of related rules, which objectively increases the tax burden on the crypto industry. A tax framework that is transparent, stable, and aligned with the characteristics of the crypto industry is imperative. In fact, Do Kwon was indeed dissatisfied with the Korean tax system, believing that he bore an excessive tax burden under Korean tax law, and compared to that, transferring profits and wealth to the BVI, known for its zero tax rate, was clearly a more economical choice. However, Do Kwon still overestimated his ability to evade taxes and the investigative capabilities of tax authorities in various countries. In other words, regardless of whether UST collapsed, Do Kwon would inevitably be investigated for tax evasion; it was just that this collapse accelerated the arrival of tax charges. In a sense, crypto assets for Do Kwon and countless other crypto millionaires are not only a symbol of wealth and status but also a potential constraint. Once they decide to evade taxes or violate other regulatory requirements, these constraints can turn into real shackles.

Even though the tax rules regarding crypto assets are not yet perfect, we still need to pay attention to current tax compliance issues to avoid unnecessary penalties and losses before any changes in tax rules occur. To ensure transaction compliance and avoid tax risks, investors in the crypto asset field should pay attention to:

First, improve internal tax management systems. For crypto enterprises, establishing a comprehensive, systematic, and rigorous tax management framework is essential. From the issuance and distribution of tokens to the accounting of various business revenues and the monitoring of cross-border capital flows, every link must be included in the consideration of tax compliance. By having a sound internal management system and auditing mechanism, the accuracy and completeness of tax information can be ensured, effectively preventing potential tax risks.

Second, keenly observe policy dynamics and flexibly adjust strategies. The crypto asset industry is still in its early stages, with frequent changes in tax policies and significant regional differences. Investors and enterprises must closely monitor the policy dynamics of various countries and international organizations in the field of crypto asset taxation, keeping abreast of the latest regulatory changes and trends.

Third, actively leverage professional expertise to enhance compliance levels. The tax issues related to crypto assets are highly specialized and complex, making it wise to seek collaboration with professional lawyers, accountants, or tax advisory teams familiar with crypto asset tax regulations. These professionals can provide precise tax consulting services, develop personalized tax compliance plans based on the actual situation of enterprises or individuals, identify potential tax risk points in advance, and offer effective response strategies. Additionally, professional crypto asset tax reporting software can be utilized to assist in this process, as such software can efficiently and accurately handle large volumes of complex transaction data, significantly improving the efficiency and accuracy of tax reporting and effectively avoiding tax risks caused by human errors.

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