[INTERVIEW] EU's crypto rules could affect Terra's Do Kwon

A representation of major cryptocurrency Ethereum is seen in front of a stock graph and U.S. dollar in this illustration from Jan. 24, 2022. Reuters-Yonhap

This is the last in a three-part series of interviews with cryptocurrency experts regarding the extradition of fallen Korean crypto entrepreneur Do Kwon, as the Terraform Labs co-founder is wanted by the U.S. and South Korea, after the firm's cryptocurrency hugely devastated retail investors around the world. ― ED.

Regulators need clear definition of digital assets

By Kim Yoo-chul

Both Korean and U.S. authorities have requested the extradition from Montenegro of a Korean national, Kwon Do-hyeong, or Do Kwon, a co-founder of crypto company Terraform Labs.

He is wanted over his direct links with the at-least-$40-billion fall of the company's Terra and its sister Luna cryptocurrencies that caused huge panic among global investors.

The first legal hearing for Kwon is set to be held on May 11 in a court in the small eastern European country of Montenegro. Kwon and his top confidants were arrested at Montenegro's Podgorica Airport in March while trying to depart for Dubai using fabricated Costa Rican passports. Because the Luna tokens had been used to raise funding for Terra projects and the fact that investors were affected by the company's high-profile collapses, means that Kwon is suspected of having violated Korea's capital market law.

In the U.S., the fallen crypto entrepreneur was also charged with a high-level conspiracy to commit commodities fraud, wire fraud, securities fraud and engaging in market manipulation, a filing with the Southern District of New York federal court showed.

While Korean prosecutors were attempting to retrieve illegal gains and funds unlawfully raised by Kwon through collaboration with Binance, the world's largest cryptocurrency exchange operator, it's fair to say that chances are very low that the vast majority of Kwon's gains will ever be retrieved.

Tech expert Ian Khan

So far only 463 billion won worth of funds and assets were located by local prosecutors and the fallen cryptocurrency mogul is said to have converted his gains into bitcoin and hidden at least "a few million dollars" in the Swiss-based Sygnum Bank, which offers both lending and trading services for crypto assets.

Kwon's attorneys were asking a judge in the New York federal court to dismiss the Securities and Exchange Commission's (SEC) charges against him claiming that Luna tokens weren't securities but should have been viewed as currencies.

Speaking to The Korea Times, a technology futurist thinks that the fallen crypto mogul Kwon's legal representatives are positioned to pursue the "verbiage used in the cryptocurrency industry to gain advantages they can," because of the absence of a clear industry definition.

"As the case against Kwon progresses, we are going to see local, regional, national as well as international perspectives from a legal standpoint. Regulations and laws for cryptocurrency as currencies or securities are still murky and this poses a major challenge for any legislation or proceedings to take place against a defendant," Ian Khan, a tech expert on CNN, Bloomberg, Forbes and also best-selling author of "7 Axioms of Value Creation," said in an interview.

"We direly need asset classification to follow certain naming conventions and a clear definition of what type of an asset it is, must be created," he stressed.

From that standpoint, Khan, a three-time TEDx speaker and a member of the National Speaker Association, said he welcomes the EU Parliament's recent moves to pass new rules to regulate Europe's burgeoning cryptocurrency market.

"The latest EU action is a step in the right direction to create a stable and regulated industry," said Khan who has worked with clients in finance, banking, the tech industry and governments including Intel, Microsoft and the UAE's Prime Minister's Office.

The Markets in Crypto-Assets (MiCA) legislation represents the EU's aim to legitimize and regulate various crypto assets. Under the legislation, the European Securities and Markets Authority (ESMA) could be able to trace all transactions over 1,000 euros from self-hosted wallets to centralized wallets such as those hosted on cryptocurrency exchanges. Plus, the EU's securities body will also be given the full authority to restrict and even ban unqualified cryptocurrency platforms.

Investors and authorities' focus are on how the EU's new crypto rules will affect Kwon's legal challenges and also affect the SEC's opposition to writing new rules as SEC Chairman Gary Gensler does believe the financial regulations already on the books are clear enough to cover any novel peculiarities of decentralized technology.

While such a legal insecurity ― specifically when it comes to the specific definition of crypto assets from a legal standpoint ― is raising the possibility for U.S. cryptocurrency exchange operators to relocate their investment portfolios. It is believed that the EU's new rules would accelerate the pace of collaboration between the SEC and law enforcement authorities in setting up standards on crypto assets in the U.S. in terms of regulation by enforcement.

Khan went on to say that the EU's new rules "will eliminate the possibility of any and every platform claiming their platform is qualified while they may not be." According to him, the MiCA crypto legislation will become "a means to seek standardization, operational excellence and enable platform operators as valid participants" in the cryptocurrency industry.

"As regulations, both local and global, come into play and regulations are created to facilitate the best way for cryptocurrencies to be traded either as securities, commodities or currencies. It is expected that a stabilization of the crypto financial system will take place. As the SEC and other countries consider how best to incorporate or whether to incorporate crypto as a viable financial instrument, more updates are likely to happen in the next few years," he said.

Binance urged to track Kwon

Citing the fall of Sam Bankman-Fried and FTX, also the result of a token price collapse of FTT, some said Binance CEO Chengpeng Zhao is now in the hot seat. Binance is being investigated in the U.S. as the price crash came after Zhao's decision to sell some $500 million worth of FTT.

Do Kwon, right, the cryptocurrency entrepreneur who created the failed Terra (UST) stablecoin, is taken to court in handcuffs, to face charges of forging original documents, in Podgorica, Montenegro, March 24. Reuters-Yonhap

Khan explained it's hard to say about connections between the collapse of Terra-Luna and Binance. However, he elaborated that Binance's decision to collaborate with Korean prosecutors as per Seoul's request to prohibit and prevent the co-founder Kwon and his confidants from extracting cash assets was right.

"In recent days, Binance has come to the forefront in the FTX case. While Binance isn't directly operating in South Korea and operates through the GPOAX exchange, the company has no choice but to comply with the request of South Korean prosecutors and to assist in the investigation (against Do Kwon)," said Khan, best known for creating the Future Readiness Score, an organization metric to measure and achieve future-readiness.

By highlighting Binance's efforts to support the stabilization of digital tokens, the expert elaborated that Binance's collaboration with Korean prosecutors ― as they are moving to completely cut off Kwon's access to cryptocurrencies held by the exchange ― would be a plus for it in terms of gaining more customer trust.

"As of right now, Binance is supporting the stabilization of the token. Binance has demonstrated a high level of services and commitment to help create the foundations of the cryptocurrency industry and as one of the largest platforms today is doing the right thing for its organization's credibility and to gain customer trust," Khan added.

The U.S. Commodity Futures Trading Commission earlier charged the Binance CEO Zhao and the exchange operator for possibly coaching U.S. market makers to bypass geopolitical restrictions limiting access to Binance's futures and derivatives trading desk.

Regarding Kwon's next destination, Khan said extradition processes are complex and time-consuming. "In Kwon's case, it is very unlikely that the request will be taken under consideration and based on the severity of the crime in addition to the influence created by the concerned governments, the case could move in a certain direction."