Author: TaxDAO

Do Kwon was once known as the "King of Cryptocurrency" in South Korea. But with the collapse of UST and the legal charges that followed, the name became associated with tax evasion and fraud. In May 2022, the South Korean National Tax Service issued a tax penalty of 100 billion won (approximately US$78 million) to Do Kwon, the co-founder and CEO of Terraform Labs. As early as June 2021, Terraform Labs was suspected of tax evasion. Attracted the attention of the Korean tax authorities. Do Kwon has been awaiting a final extradition decision since his arrest in Montenegro. This article will talk about the former cryptocurrency tycoon and the glorious Terraform Labs empire in the past, as well as the huge tax penalty that Do Kwon suffered.

1. The ins and outs of the Do Kwon case 1.1 The brilliance of Do Kwon and the rise of Terraform Labs

Do Kwon was born in Seoul, South Korea in 1991. He received the in Computer Science from Stanford University and worked briefly as a software engineer at Microsoft and Apple. However, not long after working, Do Kwon became disappointed with the lack of "enterprising spirit" of large companies and decided to start his own business. In January 2016, Kwon returned to South Korea for development and decided to establish his own start-up company Anyfi. However, Anyfi’s success is not the story we are going to tell today. A real encryption legend began when he and his college friend Nicholas Platias began to study blockchain technology and finally decided to found Terraform Labs. Terraform Labs' vision is to create a new type of currency system, that is, to create a decentralized, stable currency - Terra USD (UST). The birth of UST marked the rise of Do Kwon's Terra empire, but when laying the foundation for the empire, Do Kwon had a simple idea: to create "the most useful dollar possible."

UST and LUNA are core components of the Terra ecosystem. UST is an algorithmic stablecoin pegged to the value of the U.S. dollar. When minting UST, users need to destroy LUNA of equal value (i.e. 1:1 exchange); similarly, when redeeming LUNA, users need to destroy the corresponding amount of UST. At this time, there is arbitrage space between LUNA and UST. Traders can, based on interest incentives, destroy and mint when the price of UST or LUNA deviates from 1 US dollar, thus ensuring the stability of UST price through the price-supply and demand relationship. This also means that UST does not have the collateral support of external assets, but maintains the stability of its price through market supply and demand and incentive mechanisms, and thisThis is the biggest difference between UST and Tether, USDC or DAI: UST does not use legal currency or on-chain assets as collateral.

1.2 The collapse of UST and the escape of Do Kwon

In theory, the mechanism between LUNA and UST should be able to cope with various market fluctuations, but the reality is often more complex and cruel. In 2022, the Terra ecosystem collapsed precisely because this mechanism failed to effectively stabilize the price of UST in market panic. Because giant whales sold UST, and when the market supply exceeded demand for UST, the price of UST began to unravel. However, the system was unable to adjust the supply of LUNA in time, causing the price of LUNA to drop sharply, making it impossible to buy back enough UST through LUNA to keep the latter pegged to the US dollar. In the end, LUNA and UST went into a death spiral of double collapse and triggered a plunge in the cryptocurrency market. LUNA fell from a historical high of $119.51 to almost zero, losing about $45 billion in market value in a week. . In South Korea alone, approximately 200,000 investors suffered huge losses or even went bankrupt. This unexpected collapse not only destroyed the prosperous UST, but also made Do Kwon's empire crumbling.

With the collapse of UST, Do Kwon began a 10-month life on the run. During this period, South Korean prosecutors issued an arrest warrant for him in September 2022, and Interpol also issued a red notice. On March 23, 2023, Montenegro police detained Do Kwon at the airport for forging documents. After learning of the news, federal prosecutors in New York quickly charged him with fraud, including conspiracy to defraud, commodities fraud, securities fraud, wire fraud and conspiracy to manipulate the market. Accordingly, the U.S. Department of Justice requested Montenegro to extradite him to U.S. In addition, South Korea and Singapore, which have legal jurisdictions, have also made extradition requests. At present, although the Montenegrin court has not yet made a final decision, Do Kwon is most likely to be tried in South Korea.

2. Tax evasion charges and potential legal liabilities faced by Do Kwon

In addition to fraud charges, Do Kwon and Terraform Labs also face huge tax evasion charges. The South Korean National Tax Service launched a special tax investigation into The Ancore Company and Terraform Labs, the parent company of Terraform Labs, on suspicion of tax evasion in June 2021. During the tax investigation, the Korean National Tax Service discovered that Do Kwon holds 92% of the shares of Terra Singapore, the Singapore legal entity of Terraform Labs. According to investigation, the Singaporean company secretly transferred a large amount of profits to the British Virgin Islands (BVI) in order to take advantage of the BVI's loose taxes to avoid tax. As the largest shareholder, Do Kwon is naturally the biggest beneficiary of this tax evasion. This tax avoidance strategy is not uncommon, SamsungElectronics Vice Chairman Lee Jae-yong was summoned by South Korean prosecutors in 2021 for setting up a shell company in the BVI to transfer profits. This type of overseas tax evasion has always been a key target of South Korea's crackdown.

The first step in determining the crime of tax evasion should be to clarify jurisdiction. In the Do Kwon case, although Do Kwon transferred most of the crypto asset profits to the BVI company through the design of the company's equity structure, which greatly reduced the actual tax burden, according to the actual operating principles adopted by South Korea, Do Kwon's Although the controlled company is registered outside South Korea, it is actually still engaged in crypto asset operations in South Korea, and therefore should pay relevant taxes in South Korea.

South Korea’s standards for judging tax evasion crimes are relatively close to the standards commonly used in other countries. The first point is to determine whether there is tax evasion, that is, not declaring or underdeclaring income, property or other taxable items; the second point is that taxpayers know that they are reducing or evading tax payments and do so intentionally, because tax evasion behavior Generally it cannot be caused by negligence, misunderstanding or unconscious behavior; the third point is to reach a certain amount standard. According to the details of the case disclosed by the authorities, Do Kwon was aware of the company's equity structure and tax arrangements. Although South Korea has not clearly stipulated the specific amount of tax evasion, the amount of tax evaded by Do Kwon is not small. Therefore, if South Korean prosecutors can cite legal and sufficient factual evidence, it is almost inevitable that Do Kwon will be convicted of tax evasion, which means that he will face a long prison sentence and be imposed a huge tax fine of approximately 100 billion won. . If the accusations of financial fraud and other acts are also proven, Do Kwon will not only lose all his money, but also spend the most powerful years of his life in prison.

3. Reflections on the Do Kwon tax evasion case: from the king of cryptocurrency to a prisoner

In the world of cryptocurrency, the Do Kwon incident is like a blockbuster, triggering the encryption industry’s supervision of crypto assets, especially It is a profound reflection on tax compliance supervision. An increasingly prominent contradiction is that, on the one hand, the crypto industry is full of vitality and has been growing exponentially after several bull and bear cycles, producing a huge wealth effect that is rare in human history; on the other hand, various countries and regulators The agency has a relatively mature but traditional set of regulatory rules in its hands, trying to bring the crypto industry under its control. In the face of crypto-assets, an emerging thing, regulatory measures taken by various countries are certainly based on considerations of maintaining financial order and economic stability, but they may affect the normal development of the crypto-asset industry. As Trump said when criticizing former U.S. SEC Chairman Gary Gensler, the SEC’s past strict regulatory measures are likely to make the United States less competitive in the global cryptocurrency and blockchain fields. Perhaps the most effective help for a new thing is to wait and see its changes and intervene prudently.

From the perspective of tax collection and administration, the tax rules for crypto assets in various countries are not clear enough., the endless innovations in the field of crypto assets have made the application of relevant rules ambiguous, which has objectively increased the tax burden on the crypto industry. A transparent and stable tax framework that is in line with the characteristics of the crypto industry is imperative. In fact, Do Kwon is indeed dissatisfied with the Korean tax system and believes that he has borne an excessive tax burden under Korean tax laws. Compared with it, transferring profits and wealth to BVI, which is famous for its zero tax rate, is obviously a more Economical choice. However, Do Kwon still overestimates his ability to avoid taxes and the level of tax investigations in various countries. In other words, regardless of whether UST collapses, Do Kwon will inevitably be investigated for tax evasion, but this collapse has accelerated the arrival of tax charges. In a sense, crypto assets are not only a symbol of wealth and status for Do Kwon and thousands of other crypto tycoons, but also a potential constraint. Once they decide to evade taxes or violate other regulatory requirements, These constraints will become real shackles

Even though the tax rules on crypto assets are not perfect, before the tax rules change, we still need to pay attention to the current tax compliance issues to avoid unnecessary Penalties and losses. In order to ensure transaction compliance and avoid tax risks, investors in the crypto asset field should pay attention to:

First, improve the internal tax management system. For crypto companies, it is imperative to establish a comprehensive, systematic and rigorous tax management framework. From the issuance and distribution of tokens, to the accounting of various business incomes, to the monitoring of cross-border capital flows, every aspect must be considered within the scope of tax compliance. Through perfect internal management systems and audit mechanisms, we ensure the accuracy and completeness of tax information and effectively prevent potential tax risks.

Second, be keenly aware of trends and flexibly adjust strategies. The crypto-asset industry is still in its early stages of development, and taxes change frequently and vary greatly from place to place. Investors and companies must pay close attention to the developments in the field of crypto-asset taxation in various countries and international organizations, and keep abreast of the latest regulatory changes and regulatory trends.

Third, actively use professional forces to improve compliance levels. Crypto-asset tax issues are highly specialized and complex, and it is wise to seek cooperation with a team of professional lawyers, accountants or tax consultants who are familiar with crypto-asset tax regulations. These professionals can provide precise tax consulting services, formulate personalized tax compliance plans based on the actual situation of enterprises or individuals, identify potential tax risks in advance, and provide effective response strategies. At the same time, you can use professional crypto-asset tax declaration software for assistance. Such software can efficiently and accurately handle large amounts of complex transaction data, greatly improve the efficiency and accuracy of tax declarations, and effectively avoid tax risks caused by human errors.