U.S., South Korea Vie Over Extradition of Crypto Fugitive Do Kwon

The U.S. and South Korea are both seeking to extradite captured crypto entrepreneur Do Kwon from Montenegro, authorities in the tiny European nation said this week, setting up competing bids to prosecute him over criminal charges tied to the collapse of his TerraUSD stablecoin. 

Legal experts said South Korea may hold the upper hand because it is party to an extradition treaty with Montenegro, but diplomacy and previous instances of the Balkan state turning over fugitives to the U.S. could also factor into where Mr. Kwon ends up. 

“A lot of this comes down to diplomacy on the Montenegrin side,” said Brendan Quigley, a former Manhattan federal prosecutor and partner at law firm Baker Botts. 

Mr. Kwon was arrested last week at the airport of Montenegro’s capital of Podgorica and is currently in jail while local authorities conduct an investigation into allegations he had a fake passport, the country’s justice minister, Marko Kovac, said at a press conference Wednesday. 

Extradition would happen after any criminal proceedings tied to the local investigation, Mr. Kovac said. A Montenegrin court would decide where Mr. Kwon is extradited and make a decision based on the severity and location of the alleged crime, the order in which extradition requests were received, and other factors, Mr. Kovac said. 

Mr. Kwon created TerraUSD, a so-called algorithmic stablecoin that aimed to maintain a price of $1. Last year the coin lost its dollar peg, triggering a chain reaction that erased $40 billion in value in digital-currency markets and wiping out many investors. 

South Korea issued a warrant for Mr. Kwon’s arrest in September and requested global policing body Interpol to issue a red notice that effectively put law-enforcement agencies worldwide on the lookout for the crypto entrepreneur. He faces charges of violating the country’s capital markets law. The South Korea-born Stanford University graduate had been living in Singapore but vanished six months ago, until his arrest last week.

Hours after Mr. Kwon’s arrest in Montenegro, the Manhattan U.S. attorney’s office charged Mr. Kwon with eight criminal counts of fraud, alleging he lied about the effectiveness of TerraUSD’s algorithm and conspired to manipulate the price of the stablecoin.

Mr. Kwon’s lawyer representing him in the U.S. matter didn’t respond to a request for comment.  

A spokeswoman for the Seoul Southern District Prosecutors’ Office, the body investigating the TerraUSD crash, said the office believes that “a South Korean citizen should be punished in South Korea” and that doing so would be the “most helpful” way of addressing the victims. 

In South Korea, some investors have said that they prefer Mr. Kwon be extradited to the U.S. because the criminal charges there would likely carry a stronger sentence than those in South Korea.

A spokesman for the Manhattan U.S. attorney’s office said in a statement that it would seek Mr. Kwon’s extradition.

The country that is ultimately granted extradition of Mr. Kwon would be prosecuting one of crypto’s most high-profile entrepreneurs, but Montenegro isn’t likely to hand him over soon. Extradition involves slow-moving diplomatic exchanges between countries, as well as sometimes lengthy court proceedings under the host state’s domestic laws. 

“I would expect this case would take at least several months. Some cases take years,” said Jacques Semmelman, a former Brooklyn federal prosecutor and partner at law firm Katten Muchin Rosenman LLP.

Extraditions typically take place when two countries have an existing formal agreement. Mr. Semmelman said the U.S. has no bilateral extradition treaty with Montenegro, putting it at a disadvantage. South Korea and Montenegro are parties to a multilateral treaty known as the European Convention on Extradition, he said. “I think South Korea has a more compelling claim,” Mr. Semmelman said.

South Korea and the U.S. have an extradition treaty. If Mr. Kwon were to be extradited to South Korea, the U.S. could also later make an extradition request to Seoul, Mr. Semmelman said.

Extraditions can happen even without a treaty. The U.S. could make a request to Montenegro based on international comity, a recognition by one country that proceedings in another country are viewed as fair. 

Montenegro has previously extradited fugitives at the request of the U.S., including a California couple last year who had been convicted of fraud charges but absconded to avoid serving lengthy prison sentences. They were extradited in November after their arrest months earlier, according to the Justice Department. 

Mr. Quigley, the Baker Botts partner, said that when he was a federal prosecutor, he was involved in several cases where defendants were brought to the U.S. without going through a formal extradition process. Sometimes the lack of a treaty helped cut through the red tape, as did diplomacy and a good working relationship with law enforcement in a foreign country, he said.

“Just because you don’t have an extradition treaty doesn’t mean that you can’t get a defendant from another country,” he said.

Write to James Fanelli and Jiyoung Sohn at james.fanelli@wsj.com