More Firms Reveal Losses as Authorities Wind Up Raids in Probe Related to Terra’s Collapse

Prosecutors in South Korea detained three individuals on August 11 over links to an illegal cryptocurrency scheme. The arrests happened five weeks after Han Dong-hoon, the Justice Minister, had a meeting with officials from the US side to explore collaborative efforts in fighting financial crimes, particularly where cryptocurrencies are involved.

The Korean Justice Minister held discussions with the chief of the Securities and Commodities Fraud Task Force and co-chief of the Securities and Commodities Task Force in New York. The two sides identified their scope with the US Securities and Exchange Commission looking into whether or not the UST was deceitfully marketed to be more stable than it was. The South Korean prosecutors agreed to pursue whether there was market manipulation, tax evasion, and fraud.

Updates on Terra investigations

Two weeks after the Justice Minister’s visit to the US, authorities in South Korea conducted a series of raids on more than a dozen locations in the country in connection with the crash of Terra’s ecosystem. Local news outlet Yonhap News Agency reported on July 20 that investigators from the Seoul Southern District Prosecutors Office swooped on several local companies that had ties with Terraform Labs and cryptocurrency exchanges. Bithumb, Coinone and Upbit are some of those that got a visit.

The officers requisitioned records of transactions related to Terra to uncover the events that led to the collapse of TerraUSD and LUNA assets. They also reportedly raided the residence of cofounder Daniel Shin and firms he has closely engaged with in the past. The report also detailed that the investigators stayed in some locations for a week.

Newsis, another outlet, published a story on July 28 detailing that the investigators conducted the raids thoroughly.

“It took a long time to extract [relevant information] confiscated [material] and checking [its] relevance to be evidence [of wrongdoing],” an unnamed source from the prosecutor’s office said.

There have been claims that some individuals within Terraform knew a catastrophic fallout was a likely outcome or conspired to set it up. Regardless, the crash tore down retail and institutional portfolios alike.

Early Terra backers are among the biggest casualties

The ripple effects are still being felt by firms that had indirectly injected massive capital into Terraform Labs and Terra assets. Hedge fund manager Three Arrows Capital was forced to file for bankruptcy after insolvency reports. Lending and brokerage firms have equally bore the weight, with Celsius and Voyager seeking bankruptcy protection.

In the last few weeks, more firms that backed Terra and its projects have released reports highlighting the extent of the losses logged in their balance sheets.

Hashed CEO reveals his firm lost over $3.5BN from Luna’s collapse

In a recent interview with Bloomberg, Hashed chief executive Simon Seojoon Kim disclosed that his venture capital firm took a huge hit. There are discrepancies in the actual sum of tokens that the Seoul-based blockchain firm held at the time of the implosion, but all accounts are consistent with at least 30 million LUNA tokens. This would translate to $3.6 billion when the token price peaked at around $120 in April.

Kim told Bloomberg on August 2 that he purchased 30 million LUNA tokens as an early investor, and the firm held to most of it to the end. On-chain data captured by CoinDesk shows that the Korean venture fund had staked not less than $49.90 million in LUNA across the Columbus 3, 4 and 5 mainnets. Despite the significant losses his firm booked, the Hashed chief remains optimistic about the cryptocurrency industry.

“There’s no such thing as a portfolio that guarantees success [in this sector], and we make our investments with that in mind, we believe in the community’s growth and that has never changed,” he remarked.

He also outlined plans to set up a third VC fund by mid-2023, adding that he will invest in GameFi projects. His reputation, however, isn’t solid as his belief in GameFi investments. The Hashed boss has been accused of hyping the LUNA token and selling a portion of his holdings before the collapse, raising questions about his integrity. Kim addressed these reports claiming that his firm doesn’t offer trade recommendations and that he held 99% of his LUNA investment throughout the crash, only selling his staking rewards.

Uprise lost 99% of user-custodied funds in short bets

Kakao-backed Korean startup Uprise was another hard hit investor, losing 99% of custodied user funds. As reported by local news outlet Seoul Economic Daily, the crypto startup got caught up in the mess of the price crash, ‘misled’ by AI-ran automated trading strategies. Uprise employed robo-advisor, a technology that entered short sell positions using client funds.

Though the breakdown of LUNA established a sure path to zero, the token experienced temporary pumps. These brief surges, such as one that pushed LUNA from $0.68 to $7.88 in just four hours on May 11 (LUNA/BUSD pair), evidenced the volatile storm that swallowed the $20.4 million (26.7 billion won) in customer funds.

Internally, Uprise lost up to $2.9 million (3.9 billion won) of its funds. A representative confirmed to the local publication that “damage to customer assets has occurred due to unexpected great volatility in the market.” Nonetheless, the firm said it would explore various options to compensate affected customers. The firm has backing from giant venture capital firms in Korea, including KB Investments and Kakao Ventures. Its client base involves a large number of wealthy individuals and institutional entities.

There is a gray area around Uprise, though, as it is not a licensed virtual asset service provider (VASP) in South Korea, a problematic situation as the certification is required for virtual asset custodial businesses. Uprise failed to comply with this requirement as established by the Specific Financial Information Act late last year. The firm submitted that it does not collect won or invest directly in digital assets and only dabbles in futures.

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