Week In Crypto: LUNA Founder Arrested In Montenegro, Says Minister

March 24, 2023
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LUNA fugitive arrested in Montenegro, more A-list celebrities charged with fraudulent crypto “touting”, Coinbase receives a Wells notice and lobbyists try to stop UK banks from cutting off crypto.

LUNA fugitive arrested in Montenegro, more A-list celebrities charged with fraudulent crypto “touting”, Coinbase receives a Wells notice and lobbyists try to stop UK banks from cutting off crypto.

Do Kwon, the South Korean founder and former CEO of Terraform Labs, has been arrested at an airport in Montenegro, say officials.

In a tweet announcing the arrest, Montenegro interior minister Filip Adzic said that a person suspected to be Do Kwon was arrested while carrying forged ID documents and trying to board a flight to Dubai.

“One of the world’s most wanted fugitives has been arrested in Podgorica,” said Adzic, referring to the capital of Montenegro.

“The former ‘crypto king’ who is behind losses of more than $40bn was detained at the Podgorica airport.”

Adzic said that Montenegrin authorities are currently confirming the suspect’s identity, as demanded by their counterparts in the US, South Korea and Singapore, where Terraform Labs was based.

Prior to the collapse of the TerraUSD stablecoin and its LUNA collateral coin, Do Kwon was considered to be the brains behind one of the largest blockchain ecosystems in the world.

At its peak in April 2022, TerraUSD and LUNA had grown to a combined value of $40bn.

In May last year, just prior to the crash, Do Kwon is believed to have flown from South Korea to Singapore, where he listed his official residence as Terraform CEO.

Since then, Do Kwon has not been seen in public, despite a South Korean arrest warrant and an Interpol Red Notice being issued against him in September last year.

His Twitter account has been used on and off during that period. As covered by VIXIO, Do Kwon used it occasionally to object to media reports about him.

In one case, he responded to media reports that he was “in hiding” by claiming that his friends and associates know his GPS coordinates.

Last month, the SEC charged Terraform and Do Kwon with defrauding investors and unregistered securities violations.

SEC charges Justin Sun and A-list celebrities

Do Kwon’s arrest comes one day after the US Securities and Exchange Commission (SEC) charged Justin Sun, a Chinese crypto mogul, with fraud and market manipulation, as part of a scheme that included the use of A-list celebrities as crypto touts.

Sun is the founder and CEO of Tron Foundation and BitTorrent Foundation. He is also a citizen of Grenada through investment, although rumours are currently circulating that his Grenadian citizenship may be revoked.

Sun has been the public face of the Tron (TRX) blockchain and crypto-asset since it was first issued in 2017 and is the key figure behind the BitTorrent Token (BTT).

In its complaint, the SEC alleges that Sun and his companies offered and sold TRX and BTT as investments through multiple unregistered “bounty programs”, which directed interested parties to promote the tokens on social media.

These crypto “touts” were encouraged to recruit others to Tron-affiliated Telegram and Discord channels, who would then encourage others to buy the TRX and BTT tokens.

At the same time, Sun and his employees are accused of wash trading millions of dollars worth of tokens to create a false impression of organic demand for them.

Wash trading is where the same beneficial owner uses multiple accounts to buy and sell to themselves, creating fake trading volume.

“While we’re neutral about the technologies at issue, we’re anything but neutral when it comes to investor protection,” said Gurbir Grewal, director of enforcement at the SEC.

“Sun and others used an age-old playbook to mislead and harm investors by first offering securities without complying with registration and disclosure requirements, and then manipulating the market for those very securities.”

Eight celebrities have been charged as being part of the scheme, including actress Lindsay Lohan, YouTuber Jake Paul and musicians Akon, Ne-Yo and Soulja Boy.

In the complaint, Sun is accused of specifically instructing the celebrity touts not to disclose that they were being paid for their endorsements and their access to millions of followers online.

According to documents published alongside the complaint, all but two of the celebrity “touts” have agreed to paid settlements with the SEC, with fees totalling more than $400,000 collectively.

Coinbase receives Wells notice

Over at Coinbase, this week the world’s second-largest exchange received a Wells Notice from the SEC — an indication that enforcement action is likely to follow.

In a statement, Coinbase said the Wells notice covered an “undefined portion” of crypto-assets listed on the exchange, as well as the Coinbase Wallet, the staking service Coinbase Earn and the institutional platform Coinbase Prime.

The charges likely to follow will relate to the offer and sale of unregistered securities — something that Coinbase has long insisted that it does not do.

Describing the SEC’s investigation as “cursory” and “disappointing”, Coinbase said it is confident in the legality of its assets and services, and it will continue to operate as normal despite the Wells notice.

“Over the past nine months, Coinbase has met with the SEC more than 30 times, sharing details of our business to build a path to registration,” said Paul Grewal, chief legal officer at Coinbase.

“During this time, the SEC has given basically zero feedback on what to change, or how to register.

“We're disappointed that the SEC is considering courts over constructive dialogue. But if courts are required, so be it. We'll defend the rule of law.”

John Reed Stark, consultant and former head of internet enforcement at the SEC, questioned Coinbase’s public and combative response to the Wells notice.

“Rather than respond to the Wells notice privately, as most companies would, Coinbase immediately went into full offensive mode and laid out their defenses on Twitter and elsewhere, in an attempt to publicly shame the SEC into backing off,” he said.

“Not only are Coinbase's argument weak, misguided and more akin to public relations than legal positions, but Coinbase's arguments are also proven failures of crypto-mumbo-jumbo and ludicrous jaundiced rhetoric.”

When news of the Wells notice hit the headlines, Coinbase stock fell more than 25 percent.

Don’t debank us, says Crypto UK

Finally, a UK crypto lobby has written to regulators to ask that action be taken to prevent banks from restricting their customers’ ability to transact with crypto exchanges.

In a letter to the Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR), Crypto UK said its members are “deeply concerned” about the growing number of banks that have imposed restrictions.

“CryptoUK and its members have attempted to engage constructively with the banks through UK Finance for several months, during which time we have seen more banks announcing their decisions to introduce blanket blocks or limits on transactions,” said Su Carpenter, director of Crypto UK.

“Many of the major UK banks have now put in place bans or restrictions, and we are concerned that other banks and payment services providers (PSPs) may also soon follow suit.

“We now believe that action is warranted because banks are implementing blanket bans instead of taking a risk-based and case-by-case approach.”

Calling such practices “anti-competitive” and “disproportionate”, Carpenter proposed that banks and regulators work together to create a whitelist of compliant crypto exchanges with whom customers can transact.

She pointed out that the process that crypto exchanges must undergo to register as AML-compliant is typically long and costly, and that investment is rendered worthless if customers cannot deposit to the exchange.

Moreover, Carpenter said the restrictions “undermine” the government’s ambition to make the UK a global crypto hub.

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