LFG Audit Claims Didn’t Kwon Steal Terra Funds, But Can It Be Trusted?

The audit alleges that the Luna Foundation Guard spent approximately $2.8 billion defending UST’s peg.

LFG releases audit

The Luna Foundation Guard tries to clear his name.

The Terra-linked organization, founded in January to protect the dollar peg of the now-defunct TerraUSD (UST) stablecoin, has issued an external audit performed by accounting firm JS Held. The audit alleges that LFG spent all of its cash and Bitcoin reserves in its bid to defend UST’s peg between May 8 and May 16, 2022, contrary to widespread speculation that Do Kwon, co-founder of Terraform Labs, was a had embezzled part of LFG’s money during the collapse of UST. .

According to the report, LFG has spent approximately $2.8 billion, consisting of 80,081 Bitcoin and $49.8 million in stablecoins, to defend the UST peg, as LFG claimed on Twitter on May 16. In addition, the audit states that Terraform Labs will use an additional $613 million of its own capital to defend the algorithmic stablecoin’s peg.

UST was an algorithmic stablecoin developed and published by Terraform Labs. It became popular because of the extra large 20% yield that holders could earn by depositing it into Terraform Labs’ Anchor Protocol. However, unlike reserve-backed stablecoins such as USDC or BUSD, UST was algorithmically pegged to the dollar. When market forces knocked UST off its peg on May 8, there was not enough collateral in reserve to bolster its value, sending it into a death spiral, erasing more than $40 billion in value from the crypto market. Kwon has been widely criticized for the unsustainability of the UST peg mechanism and his irresponsible promotion of the stablecoin as a “risk-free” asset.

In announcing its external audit, LFG claims that the report shows that all of its funds were spent to defend UST’s dollar peg, as stated, and that the remaining balances are the only funds remaining. It also states that the audit proves that no LFG funds have been misappropriated, misused or frozen by law enforcement.

Is anyone convinced?

In September, South Korean prosecutors filed a request to freeze funds deposited in centralized exchanges believed to be related to the Luna Foundation Guard. The Seoul South District Prosecutor’s Office has alleged that LFG transferred funds to KuCoin and OKX on September 15, a day after a court in Seoul issued an arrest warrant for Kwon. Crypto research firm CryptoQuant and OXT Research member Ergo BTC have also claimed that the money came from LFG. So far, KuCoin has reportedly agreed to the prosecutor’s request and frozen the alleged LFG funds, but OKX has remained silent.

If these claims are to be believed, it would imply that an unidentified entity is somehow connected to Do Kwon and that Terra holds more than $140 million worth of Bitcoin. While prosecutors building a case against Kwon seem to believe these funds are connected, not everyone is convinced as there is no solid evidence that Kwon, Terraform Labs or LFG have any control over these coins.

In a tweet dated Oct. 5, Kwon refused the allegations that he had embezzled money. “I don’t even use Kucoin and OkEx, don’t have time to trade, no funds are frozen,” he said. “I don’t know whose money they froze, but good for them, I hope they use it for good.”

However, if Kwon is telling the truth and the $140 million worth of Bitcoin is not his, KuCoin would likely receive complaints from a large whale for unjustly freezing their funds. Since no one has come forward, it seems all the more likely that Kwon is covering up his or LFG’s involvement.

Yet JS Held, the external auditor of the LFG, seems to be a reputable company. It is unlikely that it would risk its reputation to cover up illegal activities or misappropriation of funds. While it seems increasingly likely that the $140 million in question isn’t connected to Kwon or Terraform Labs, the Terra community may be harder to convince. The full truth of the situation may not come to light until Kwon stands trial – if he ever does. Kwon reportedly fled Singapore for Europe, but insists he is not on the run. In any case, even if the audit is legit, it seems unlikely that Kwon will be able to regain the trust of the crypto community any time soon.

Disclosure: At the time of writing this piece, the author owned ETH, BTC, and several other crypto assets.