Do Kwon, the co-founder of Terraform Labs and a key figure in the 2022 TerraUSD and Luna collapse, pleaded not guilty to fraud charges in a Manhattan federal court on Thursday.
The 33 year old entrepreneur is extradited from Montenegro and charged with multiple allegations. Kwon has been charged with running a massive deception scheme that suffered $40 billion on TerraUSD.
His legal challenges intensified when Montenegro decided to extradite him, after months in detention on charges of using a fake passport.
Fraud Allegations: Manipulation Behind TerraUSD Stability
Federal prosecutors accuse Kwon of misleading investors about TerraUSD. It was an algorithmic stablecoin marketed as maintaining a $1 value through blockchain algorithms.
According to the indictment, Kwon falsely claimed that TerraUSD’s stability was secured by the “Terra Protocol.” It was an algorithm designed to restore the peg if the token’s value fell below $1.
Prosecutors allege that in May 2021, when TerraUSD’s value dipped, Kwon secretly coordinated with a high-frequency trading firm. The aim was to purchase millions of dollars’ worth of the stablecoin to artificially maintain its peg.
– Advertisement –
Prosecutors say that these actions misled institutional and retail investors into believing in the token’s reliability and boosted adoption of Terraform Labs’s products.
Kwon’s manipulation inflated the combined value of TerraUSD and Luna to over $50 billion by early 2022, prosecutors also allege. But the indictment says this growth happened on ‘brazen misrepresentations’ and ended in May 2022 with the catastrophic collapse of both tokens.
Do Kwon’s Trial Unfolds Amid Heightened Scrutiny of the Crypto
Do Kwon’s trial is unfolding as the cryptocurrency industry faces an unprecedented wave of legal and regulatory crackdowns. Terraform Labs was sued by the Securities and Exchange Commission (SEC) in early 2023. They were sued for allegedly misleading investors about TerraUSD’s functionality and stability.
A separate jury in Manhattan found Terraform Labs liable for defrauding investors last April. Though Kwon was absent due to his detention in Montenegro.
Kwon had earlier consented to a settlement with the SEC in June 2024. After which he would pay an $80m civil fine and the case would be resolved for $4.5 billion. Under the settlement, he was prohibited from engaging in any virtual currency transactions.
Nevertheless, the criminal charges made by the federal prosecutors aim at making Kwon personally liable for the destruction of the Terra ecosystem.
Impacts on the Cryptocurrency Market
The failure of the TerraUSD and Luna in 2022 led to other companies to fold. This has led to the criticism of stablecoin models and advocating for tighter regulation.
Many people refer to the Terra collapse as one of the biggest events. It led to the 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 but rather depend on algorithms.
However, Kwon’s prosecutor’s will seek to establish how he manipulated the market to his advantage, hence causing a lot of losses. It may also result in increased legal measures for stablecoins. As well as, other crypto-assets in a bid to avoid such incidents in the future.
The trial is expected to go on for several months. With both parties providing a lot of information about the functioning of Terraform Labs, its market strategies, and communications with the investors.
Source: https://www.thecoinrepublic.com/2025/01/03/do-kwon-pleads-not-guilty-in-terrausd-collapse-case-whatll-happen-next/