LFG Audit Claims Do Kwon Didn’t Steal Terra Funds—but Can It Be Trusted?

The audit asserts that the Luna Foundation Guard spent approximately $2.8 billion to defend UST’s peg. 

LFG Releases Audit

The Luna Foundation Guard is trying to clear its name. 

The Terra-linked organization, established in January to protect the dollar peg of the now-defunct TerraUSD (UST) stablecoin, has released a third-party audit conducted by accounting firm JS Held. The audit claims that LFG spent all of its cash and Bitcoin reserves in its attempt to defend UST’s peg between May 8 and May 16, 2022, contrasting widespread speculation that Terraform Labs co-founder Do Kwon had embezzled a portion of LFG’s funds during UST’s collapse. 

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

UST was an algorithmic stablecoin developed and issued by Terraform Labs. It rose to popularity due to the oversized 20% yield holders could earn by depositing it into Terraform Labs’ Anchor Protocol. However, unlike reserve-backed stablecoins such as USDC or BUSD, UST was pegged to the dollar algorithmically. When market forces knocked UST off its peg on May 8, there was not enough collateral in reserve to shore up its value, causing it to enter a death spiral, erasing over $40 billion in value from the crypto market. Kwon has been widely criticized for the unsustainability of UST’s peg mechanism and his irresponsible promotion of the stablecoin as a “risk-free” asset. 

In the announcement of its third-party audit, LFG asserts the report shows all its funds were spent to defend UST’s dollar peg as declared and that its remaining balances are the only funds remaining. It also argues that the audit proves no LFG funds were embezzled, misused, or frozen by law enforcement.

Is Anyone Convinced?

In September, South Korean prosecutors issued a request to freeze assets deposited to centralized exchanges that were believed to be connected to the Luna Foundation Guard. The Seoul Southern District Prosecutors’ Office has claimed that LFG moved funds to KuCoin and OKX on September 15, a day after a Seoul court issued a warrant for Kwon’s arrest. 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 prosecutor’s request and frozen the supposed LFG assets, but OKX has stayed silent. 

If these claims are to be believed, it would mean an unidentified entity associated in some way with Do Kwon and Terra has its hands on over $140 million in Bitcoin. While prosecutors building a case against Kwon seem to believe these funds are connected, not everyone is convinced as there is no solid proof that Kwon, Terraform Labs, or LFG have any control over these coins.

In an October 5 tweet, Kwon denied the allegations that he had embezzled funds. “I don’t even use Kucoin and OkEx, have no time to trade, no funds have been frozen,” he said. “I don’t know whose funds they’ve frozen, but good for them, hope they use it for good.”

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

Still, JS Held, the LFG’s third-party auditor, appears to be a reputable company. It’s unlikely that it would put its reputation on the line to cover up illegal activity or embezzlement of funds. While it’s looking 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 out until Kwon faces trial—if he ever does. Kwon has reportedly fled Singapore for Europe but maintains that he is not on the run. Either way, even if the audit is legitimate, it seems unlikely that Kwon will succeed in winning back the crypto community’s trust anytime soon. 

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