Terra Co-Founder’s Legal Troubles Unlikely to Affect Broader Crypto Markets

A name on the Interpol's wanted list and a Korean police alert for Terra co-founder Do Kwon’s whereabouts are unlikely to cause havoc to the broader crypto markets, two markets observers told CoinDesk on Tuesday.

Kwon's arrest warrant puts pressure on an already intensive regulatory debate about market conduct, consumer protection, and financial stability risks associated with crypto markets. Kwon’s current location is unknown and the Singapore Police Force confirmed to the press that Kwon was no longer in the city-state, where he resided until at least May.

In the weeks following Terra’s implosion in May, prices of its LUNA and UST tokens dropped over 99.7%. At the same time, decentralized finance applications built on the network lost some $28 billion in market value – making the entire ordeal one of the single-largest capital destructive event in the history of cryptocurrencies.

Some are, however, playing down the impact of Kwon’s legal troubles on broader crypto markets.

“In my opinion, Terra doesn’t present systemic risks to the broader crypto markets, especially with regard to investments in the sector,” Victor Young, software architect at blockchain network Analog, told CoinDesk, pointing to the overall perception of cryptocurrencies remaining positive among investors.

However, Young added that regulators and policymakers were increasingly seeing the scale of the losses in the industry as “a major warning sign” of possible future worst-case scenarios.

Young added that the quick formation of Terra 2.0 – a separate blockchain built to regain investors’ trust – showed how fast developments in the crypto markets take place. “It (Terra 2.0) already attracted a syndicate of investors and users who are likely to suffer because of such a move, which demonstrated that regulators and policymakers are failing to keep pace with the speed of innovation,” he said.

Ajay Dhingra, head of research and analytics at crypto exchange Unizen, likened Terra’s fall to a major bank affected during the 2008 recession.

"The Terra collapse is somewhat similar to the Lehman Brothers Meltdown in the Great Financial Crisis of 2008,” Dhingra told CoinDesk in a Telegram message. “The arrest warrant will cause an extreme spike in the LUNA's volatility, as investigators piece together the most significant event of 2022."

LUNA, and Luna Classic (LUNC), have been two of the most-volatile tokens in the past few months. LUNC fell from April highs of $119 to $0.00000099 in mid-May, and has since risen a staggering 29,000%. Its value has doubled in the past month – even as the broader market did not show similar growth.

LUNA, on the other hand, gained 200% in a speculative rally over a few days last week following the release of a fundamental catalyst. Those gains were reversed almost as immediately as the rise, and now trading at levels last seen in August.