Admission of Fraud in the Terra Collapse
In a court session before Judge Paul Engelmayer in Manhattan, Do Kwon admitted to charges of conspiracy to commit fraud and wire fraud. The 32-year-old former CEO acknowledged orchestrating a fraudulent scheme related to the two main coins of the Terra ecosystem, LUNA and TerraUSD (UST).
Kwon admitted to deliberately providing misleading information and deceiving investors about the stability and true nature of the Terra system. The collapse in May 2022 wiped out over $40 billion in market value and triggered a domino effect across the cryptocurrency market.
Details of the Plea Agreement
According to the agreement with prosecutors, Do Kwon will face:
- Financial penalty: Over $19 million
- Sentencing range: Up to 25 years in prison
- Prosecutor’s recommendation: No more than 12 years if Kwon fully cooperates and does not commit any further offenses
The conditions for a reduced sentence depend on the level of Kwon’s cooperation in providing information for other investigations and a commitment not to reoffend.
Widespread Impact on the Crypto Market
The collapse of the Terra ecosystem did not stop at a $40 billion loss. This event triggered a strong wave of sell-offs across the cryptocurrency market, erasing hundreds of billions of dollars in market capitalization and shaking investor confidence in DeFi projects.
Many major projects and investment funds had to declare bankruptcy or face severe financial difficulties due to exposure to the Terra ecosystem, including the hedge fund Three Arrows Capital.
After the collapse of the Terra ecosystem, Do Kwon became one of the most wanted individuals in the cryptocurrency industry. He evaded capture for nearly a year before being arrested in Montenegro in March 2023.
At the time of his arrest, Kwon was using a fake passport and attempting to leave Europe. After a lengthy legal dispute between the U.S. and South Korea over extradition rights, he was eventually extradited to the U.S. to face charges there.
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Background on the Terra Ecosystem and Its Significance
Terra was designed as a blockchain ecosystem focused on creating decentralized stablecoins. TerraUSD (UST) was promoted as an algorithmic stablecoin that did not require collateral, maintaining a 1:1 peg with the USD through a burning and minting mechanism with LUNA.
However, this mechanism proved unstable when strong selling pressure caused UST to lose its peg, leading to the collapse of LUNA and creating a death spiral from which the system could not recover.
Kwon’s admission of guilt marks a significant turning point in handling major fraud cases within the cryptocurrency industry. This also sends a strong signal from U.S. regulators about their determination to prosecute illegal activities in this field.
The sentencing hearing on December 11 will be closely monitored by the industry, not only to learn the specific sentence but also to assess the judicial system’s approach to similar cases in the future.
