Key Takeaways
- A new external audit of the Luna Foundation Guard has been released.
- The report claims that LFG used its $2.8 billion in funds in an attempt to strengthen the UST’s position in May.
- While the audit appears reliable, Korean prosecutors claim they have frozen funds embezzled by Terra figurehead Do Kwon.
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The audit shows that the Luna Foundation Guard spent approximately $2.8 billion defending the UST’s position.
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 carried out by accounting firm JS Held. The audit claims that LFG spent all its cash and Bitcoin reserves in its attempt to defend UST’s peg between May 8 and 16, 2022, contradicting widespread speculation that Terraform Labs co-founder Do Kwon had some of LFG’s funds had been embezzled during the collapse of UST. .
According to the report, LFG spent approximately $2.8 billion, consisting of 80,081 Bitcoin and $49.8 million in stablecoins, to defend UST’s position, as LFG claimed on Twitter on May 16. Additionally, the audit states that Terraform Labs itself spent an additional $613 million. capital to defend the algorithmic stablecoin 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 like USDC or BUSD, the UST was algorithmically pegged to the dollar. When market forces knocked UST off its peg on May 8, there wasn’t enough collateral in reserve to support its value, sending the company into a death spiral and wiping out more than $40 billion in value from the crypto market. Kwon has been widely criticized for the unsustainability of the UST’s pegging mechanism and his irresponsible promotion of the stablecoin as a “risk-free” asset.
In the announcement of its external audit, LFG claims that the report shows that all its funds have been spent defending the UST’s dollar peg, as indicated, and that the remaining balances are the only funds remaining. It also states that the audit shows that no LFG funds were embezzled, 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 linked to the Luna Foundation Guard. The Seoul Southern District Prosecutor’s Office has alleged that LFG transferred funds to KuCoin and OKX on September 15, a day after a Seoul court issued an arrest warrant for Kwon. Crypto research firm CryptoQuant and OXT Research member Ergo BTC have also claimed that the funds came from LFG. So far, KuCoin has reportedly agreed to the plaintiff’s request and frozen the alleged LFG funds, but OKX has remained silent.
If these claims are to be believed, it would mean that an unidentified entity somehow connected to Do Kwon and Terra controls over $140 million worth of Bitcoin. Although prosecutors building a case against Kwon seem to believe that these funds are linked, not everyone is convinced as there is no solid evidence that Kwon, Terraform Labs, or LFG have any control over these coins.
In an Oct. 5 tweet, Kwon said refused the accusations 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’ve frozen, 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 big whale for wrongfully 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 accountant of the LFG, appears 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 is increasingly likely that the $140 million in question is not related 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 has reportedly fled to Europe from Singapore, but claims he is not on the run. In any case, even if the audit is legitimate, it seems unlikely that Kwon will be able to regain the trust of the crypto community anytime soon.
Disclosure: At the time this piece was written, the author owned ETH, BTC, and several other crypto assets.
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