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Do Kwon, co-founder of Terraform Labs and a key figure in the collapse of TerraUSD and Luna 2022, pleaded not guilty to fraud charges in Manhattan federal court on Thursday.
The 33-year-old entrepreneur was extradited from Montenegro and charged with multiple charges. Kwon is accused of running a massive fraud scheme that cost TerraUSD $40 billion.
His legal challenges intensified when Montenegro decided to extradite him, after spending months in detention on charges of using a fake passport.
Fraud Allegations: The Manipulation Behind TerraUSD’s Stability
Federal prosecutors accuse Kwon of misleading investors about TerraUSD. It was an algorithmic stablecoin advertised as maintaining a value of $1 through blockchain algorithms.
According to the indictment, Kwon falsely claimed that the stability of TerraUSD was ensured by the “Terra Protocol”. It was an algorithm designed to restore the peg if the value of the token falls below $1.
Prosecutors allege that in May 2021, when the value of TerraUSD fell, Kwon secretly coordinated with a high-frequency trading firm. The goal was to buy millions of dollars worth of stablecoin to artificially maintain its exchange rate.
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The plaintiffs say these actions misled institutional and retail investors into believing the tokens were reliable and spurred adoption of Terraform Labs’ products.
Kwon’s manipulation inflated the combined value of TerraUSD and Luna to over $50 billion by early 2022, prosecutors also claim. But the indictment says this growth took place based on ‘brazen false statements’ and ended in May 2022 with the catastrophic collapse of both tokens.
Do Kwon’s trial comes amid heightened crypto scrutiny
Do Kwon’s trial comes as the cryptocurrency industry faces an unprecedented wave of legal and regulatory attacks. The Securities and Exchange Commission (SEC) sued Terraform Labs in early 2023. They were sued for allegedly misleading investors about the functionality and stability of TerraUSD.
A special jury in Manhattan found Terraform Labs liable for defrauding investors last April. Although Kwon was absent due to detention in Montenegro.
Kwon previously agreed to settle with the SEC in June 2024. After that, he would pay an $80 million civil penalty and the case would be settled for $4.5 billion. According to the settlement, he was prohibited from engaging in any virtual currency transactions.
Despite this, federal prosecutors’ criminal charges aim to make Kwon personally responsible for the destruction of the Terra ecosystem.
Impact on the cryptocurrency market
The failure of TerraUSD and Luna 2022 led to the withdrawal of other companies. This has led to criticism of the stablecoin model and calls for stricter regulation.
Many people call the collapse of Terra one of the biggest events. This has led to a loss of confidence in the crypto industry.
TerraUSD and other algorithmic stablecoins have been criticized for the high risks they pose. Given that they do not have fiat or asset backing, they depend on algorithms.
However, Kwon’s prosecution will try to establish how he manipulated the market to his advantage, thereby causing huge losses. This may also result in increased legal measures for stablecoins. As well as other crypto-assets in an attempt to avoid such incidents in the future.
The trial is expected to last several months. In which both parties provided a lot of information about the functioning of Terraform Labs, its market strategies and communication with investors.
