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Terra Labs, Luna Guard commission audit to defend against allegations of misusing funds

The audit tracked efforts to defend the UST peg May 8-12 and no found wrongdoing. LFG used the data to draw conclusions about frozen funds.

The Luna Foundation Guard (LFG) and Terraform Labs (TFL) commissioned a technical audit of their efforts to defend the price of TerraUSD (UST) between May 8 and 12, 2022. The audit was intended to answer “allegations posed in social media” about the fate of funds transferred during efforts to defend the UST dollar peg, according to the LFG blog.

The audit found that LFG spent 80,081 Bitcoins (BTC) and $49.8 million in stablecoins (about $2.8 billion at the time) to defend the UST peg. That was consistent with what LFG indicated in its tweets on May 16. In addition, TFL spent $613 million to defend the peg. The audit was conducted by U.S. consulting firm JS Held.

LFG concluded that the audit results show there was no misuse of funds and no funds were used to benefit insiders. Furthermore, LFG claimed the audit dispelled the allegation that “LFG fund [were] frozen by law enforcement.” Rather, “all LFG funds are kept in self-hosted wallets, have not moved since the May 16th tweet, and have not been frozen.”

1/ A third party audit of LFG and TFL’s peg defense activity during May 2022 has been published: https://t.co/3vwSBhQcNq

— Do Kwon (@stablekwon) November 16, 2022

The final conclusion is unsupported in the text and is interesting in light of the fact that South Korean police requested on May 23 that exchanges freeze funds toed to LFG. In September, South Korean authorities again asked exchanges KuCoin and OKX to freeze 3,313 BTC transferred from a wallet created Sept. 15 in the name of the LFG.

Related: Terraform Labs claims case against Do Kwon is ‘highly politicized:’ WSJ

The LFG blog quoted Terraform Labs founder Do Kwon, who faces criminal charges in South Korea and whose current whereabouts are unknown, as saying:

“It is important to distinguish between Terra’s case, where a transparent, open-source decentralized stablecoin failed to maintain peg parity and its creators spent proprietary capital to try to defend it, and failure of centralized custodial platforms where its operators misused other people’s money (customer funds) for financial gain.”

In the Twitter thread announcing the audit, Kwon wrote, “Many of you lost a lot of money in UST – for this I am sorry. While the system was transparent and open source, _I_ as its creator should have understood and communicated its risks better.”

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