Founder of Terraform Labs, Do Kwon, is facing a possible 12-year prison sentence. Federal prosecutors have requested a severe sentence, arguing that the collapse of TerraUSD and LUNA, which wiped out over $40 billion of value in 2022, is one of the heaviest and most damaging crypto frauds in recent history.
Remarkable Scale of Fraud
In their submission to Judge Paul Engelmayer (Southern District of New York), prosecutors emphasize that Do Kwon conducted ‘a multi-year fraud’ that deprived investors of any transparency on the risks of the Terra ecosystem. They claim he artificially inflated token values, enhancing his reputation as purchases surged under false pretenses.
Do Kwon pleaded guilty in August to charges of fraud and conspiracy to defraud. Initial accusations filed in March 2023 included commodity fraud, securities fraud, market manipulation, and money laundering. Central to the case: the UST stablecoin collapse, designed to maintain its peg via an algorithmic mechanism backed by the LUNA token.
The Terra system’s implosion triggered a series of crypto bankruptcies in 2022, heightening risk perceptions and pushing several platforms over the edge. Prosecutors argue that Do Kwon lied about the structural stability of the ecosystem and concealed known vulnerabilities.
Defense Advocates for a Maximum of 5 Years
Do Kwon’s defense attorneys argue that a sentence of up to five years would be sufficient. They claim the collapse resulted not only from Terra’s engineering but also ‘coordinated trades’ from third-party actors exploiting market loopholes. They cite academic analyses and Chainalysis reports to support their argument.
Prosecutors challenge this defense, highlighting a history of deceptive behaviors and Do Kwon’s direct responsibility in designing and promoting the UST – LUNA mechanism.
They also seek the confiscation of over $19 million, but do not request restitution, citing the logistical complexity of identifying each victim’s losses amid ongoing bankruptcy proceedings.
Judicial Turmoil Prior to Extradition
Arrested in March 2023 in Montenegro for using forged travel documents, Do Kwon was at the center of a lengthy tug-of-war between the United States and South Korea, each vying for his extradition. It finally took place to the U.S. in December 2024.
Simultaneously, Do Kwon and Terraform were found liable for civil fraud in April 2024 in a lawsuit brought by the SEC, even though Do Kwon was not physically present.
The sentencing request, signed by federal prosecutor Jay Clayton, former SEC chairman under Trump, marks the final stretch of the case. The verdict will be announced on December 11.
