Wemade and Exchange Raided
Proving Violation of Capital Markets Act Is Key
The prosecution, which is examining independent lawmaker Kim Nam-guk's cryptocurrency investments, is expanding the scope of its investigation to include the 'Wemix false disclosure' case. It appears that they are broadly re-examining controversies in the cryptocurrency market beyond just the lobbying allegations against Kim. Depending on the results of this investigation, additional charges of violating the Capital Markets Act may be brought against Kim, drawing attention to the prosecution's actions.
Jang Hyun-guk, CEO of Wemade, is giving a briefing during the on-site visit of the People Power Party's Coin Gate Investigation Team at Wemade headquarters in Pangyo, Seongnam-si, Gyeonggi-do on the morning of the 19th of last month. Photo by Yonhap News
According to the legal community on the 2nd, the Seoul Southern District Prosecutors' Office Financial Investigation Division 1 (acting head Chae Hee-man) conducted a search and seizure of Wemade's headquarters over two days on the 24th and 26th of last month. Additionally, on the 31st, they raided domestic cryptocurrency exchanges Upbit, Bithumb, and Coinone. This was just fifteen days after searches of domestic cryptocurrency exchanges on the 15th and 16th of last month. Through these raids, the prosecution is reported to have secured records of the issuance and circulation of Wemix, which was issued by Wemade.
Notably, it was not the Criminal Division 6 (chief prosecutor Lee Jun-dong), which had been investigating Kim's cryptocurrency investments, but the Financial Investigation Division 1 that took action. Because of this, insiders and outsiders of the prosecution speculate that this search was conducted in connection with Wemade CEO Jang Hyun-guk, who was sued for fraud and violations of the Capital Markets Act. The lawsuit against CEO Jang had been handled by Criminal Division 6, which was investigating Kim's cryptocurrency holdings. However, since Criminal Division 6 specializes in corruption crimes of high-ranking officials and election crimes, the determination of whether Wemix constitutes securities and the investigation of CEO Jang's Capital Markets Act-related matters were assigned to Financial Investigation Division 1.
According to the Capital Markets Act, when multiple people invest in another's business and there is a risk of loss depending on the business outcome, it is considered a financial investment product. Among these, financial investment products where investors can lose as much as they put in are regarded as 'securities.' If the prosecution determines Wemix to be a security, CEO Jang can be indicted for violating the Capital Markets Act. Furthermore, if Wemix's status as a security is recognized, additional charges of violating the Capital Markets Act can be added against Kim. Violations of the Capital Markets Act can result in life imprisonment or imprisonment for five years or more.
Wemade was embroiled in controversy over false disclosures related to Wemix last year. Last year, Wemade issued a stablecoin called 'Wemix Dollar,' whose value is fixed. One Wemix Dollar holds the same value as one USD Coin (USDC), which acts as the dollar in the cryptocurrency market. To maintain this value, Wemade must hold USDC equivalent to the amount of Wemix Dollar issued. This can be compared to the gold standard, where a central bank holds gold equivalent to the face value of the dollar.
To this end, Wemade deposited existing Wemix as collateral on the collateral-type stablecoin platform 'Cocoa Finance' and borrowed Cocoa Stable Dollar (KSD). Wemade sold KSD on overseas cryptocurrency exchanges and purchased USDC.
The problem is that Wemade did not disclose that it released Wemix into the market as collateral. It is known that 35.8 million Wemix were deposited with Cocoa Finance. The initial issuance of Wemix was 1 billion, and the circulating supply is about 100 million, roughly 10% of the issuance. Ultimately, the 35.8 million Wemix deposited as collateral by Wemade accounts for more than 30% of the existing circulating supply. As the circulating supply increased, Wemix's market price declined. In October last year, domestic cryptocurrency exchanges Upbit, Bithumb, Coinone, and Korbit delisted Wemix due to false disclosure. Wemade filed for a provisional injunction to suspend the delisting, but the court dismissed it.
Attorney Yae Ja-seon of the law firm Gwangya said, "Wemade's actions caused harm to an unspecified large number of people," adding, "The prosecution's judgment and the judiciary's law enforcement this time will have repercussions beyond just Wemix in the cryptocurrency market."
The prosecution is also expected to further investigate Kim's allegations. Through materials containing transaction flows, lobbying suspicions related to Kim can also be examined. Last year, Kim transferred about 800,000 Wemix from an Upbit cryptocurrency wallet to a Bithumb cryptocurrency wallet. The Financial Intelligence Unit (FIU) judged this as an abnormal transaction and submitted the data to the prosecution. The source of the approximately 800,000 Wemix invested by Kim is unclear. As of the end of 2021, Kim disclosed assets amounting to 1.11581 billion KRW in deposits. He explained that he sold LG Display stocks and invested about 1 billion KRW in Wemix, but his deposits did not decrease.
Kim denies the related allegations and asserts his innocence. On the 31st of last month, Kim appeared at the National Assembly and said, "(The money laundering allegations) are absurd," adding, "I hope Upbit rechecks the facts."
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