Do Kwon, co-founder and chief executive officer of Terraform Labs, works on his laptop in the company's office in Seoul, South Korea, on April 14, 2022. Image Credit: Bloomberg

Crypto fugitive Do Kwon received a boost after a court allowed an executive linked to his collapsed Terraform Labs ecosystem to avoid jail and indicated room for dispute over some of the allegations the person faces.

The court in Seoul said it didn't see a need to detain the suspect and added there's scope for legal debate over whether the individual breached the nation's capital-markets law, charges that Kwon and four others also face.

Kwon created a pair of tokens, an algorithmic stablecoin TerraUSD that was meant to have a constant $1 value in a complex arrangement with a sister coin, Luna. The project suffered a spectacular $60 billion wipeout in May, roiling the global crypto market and shocking regulators.

Kwon's location became unclear after South Korea last month sought his arrest. He is the subject of an Interpol red notice but has denied wrongdoing. One of the issues in the case is whether Luna was subject to securities law - echoing a wider question officials globally are asking about the status of digital tokens.

The Seoul court said in the judgment Thursday that the charges in the case are very serious while adding there's room for legal argument over whether Luna counted as an investment contract security under the Capital Markets Act.

Prosecutors in Seoul said the judgment probably was a boost for Kwon's case.

'Optical setback'

The development "could be an optical setback for the prosecutors, but they may still be able to charge Kwon with various other types of offence outside the realm of market misconduct, so this won't necessarily close off that many available avenues for them," said Claire Wilson, a partner at compliance and legal consulting firm Holland & Marie in Singapore.

The person who avoided jail is publicly known only by the surname Yu. Prosecutors on Thursday confirmed the individual had been arrested on charges including violations of the capital-markets law, fraud and breach of duty related to market manipulation.

Kwon didn't reply to a request for comment. He earlier retweeted a story about Yu avoiding detention.

Hagen Rooke, a partner at law firm Reed Smith LLP in Singapore, said market abuse frameworks currently only apply in respect of traditional capital markets products and not cryptocurrency in most jurisdictions.

This week, South Korea said Kwon must hand back his passport or it'll be revoked, and a local report said prosecutors have frozen an additional 56.2 billion won ($40 million) of assets they claim are Kwon's, bringing the total to about 95 billion won.

Kwon subsequently said on Twitter that he didn't know whom the funds belonged to. A spokesperson for Terraform Labs has labeled the case against him as "highly politicized." Prosecutors have said Kwon should appear promptly before them to make his position clear.