Crypto Fraudster Do Kwon Sentenced for $40bn Stablecoin Disaster
Synopsis
Ex-crypto entrepreneur Do Kwon was handed a 15-year jail term following the downfall of TerraUSD and Luna which wiped out $40 billion. The South Korean co-founder of Terraform Labs was found to have misled investors about the stablecoin. In May 2021, when TerraUSD had fallen below $1, Kwon lied about computer algorithms fixing the problem while secretly arranging purchases to artificially jack the price up. The judge said it was fraud on an epic, generational scale.
A previous crypto executive responsible for two currencies that failed and caused losses estimated at $40 billion has been handed a 15-year prison term by a New York judge described as an "epic" fraud.
Do Kwon, a Korean citizen, co-founded Terraform Labs, based in Singapore, which created the TerraUSD and Luna cryptocurrencies. Kwon has acknowledged deceiving investors regarding TerraUSD, a "stablecoin" intended to maintain a value pegged to the US dollar.
He becomes part of a group of emerging crypto leaders confronting accusations in the United States following the collapse of digital tokens in 2022, which led to the downfall of multiple firms.
Judge Terms It Fraud on 'Generational Scale'
On Thursday, in Manhattan, US District Judge Paul A. Engelmayer delivered the sentence during the court session. The judge noted that the Stanford alumnus consistently deceived investors who entrusted him with their faith and their funds. "This was a once-in-a-generation scam," stated Judge Engelmayer. "Throughout the history of cases, only a few frauds have caused more severe economic damage than yours."
Kwon admitted guilt to conspiracy to defraud and wire fraud charges in August. At the hearing, he expressed to the judge that he was "genuinely sorry for what occurred." "I have devoted all my conscious time over the past several years reflecting on what I might have done differently and what steps I can take now to correct things," Kwon stated to the court.
Secret Deals to Prop Up Failing Coin
During their opening remarks, prosecutors described how Kwon deceived investors as his stablecoin started to struggle. Following the collapse of TerraUSD beneath its $1 peg in May 2021, Kwon guaranteed investors that a computer algorithm had reinstated its worth.
This statement was false. In truth, based on the court filings, Kwon had orchestrated a trading company to covertly purchase millions of dollars of the coin to create a false perception of its value. This fraud misled investors into believing that the stablecoin was functioning as intended when it actually was not.
Stablecoins are intended to function. While Bitcoin and other cryptocurrencies experience fluctuations in value, stablecoins maintain a consistent price, commonly around $1. This steadiness makes them valuable for individuals aiming to transfer funds in and out of digital assets without facing significant price volatility.
TerraUSD tried to keep its price at $1 using a system linked to its counterpart currency, Luna. When one coin’s value increased, the other’s decreased, theoretically keeping equilibrium. However, the whole system actually relied on demand for both coins. When trust was shattered in May 2022, the entire system disintegrated: TerraUSD plunged below $1, and Luna lost nearly all its value. Within days, billions of dollars vanished.
Investors Forfeited Life Savings
The failure destroyed the savings of thousands worldwide. Several investors had invested their life savings in what they believed to be a secure and reliable investment. Afterwards, online communities became flooded with stories from individuals who lost all they had. The crash caused turmoil across the whole digital currency sector. Numerous other firms holding TerraUSD or Luna experienced losses. Several of them went bankrupt. The downfall contributed to a crash in crypto valuations during that year.
Kwon transitioned from that to becoming one of the sought-after individuals in the cryptocurrency world. After the downfall, he disappeared, triggering a search. Officials ultimately captured him in Montenegro in March 2024 at the airport, where he attempted to catch a flight using forged papers.
He had spent months evading capture, crossing borders from one nation to another to escape detention. Throughout this period, both South Korea and the United States submitted extradition petitions concerning accusations against him. This case clearly highlights the dangers of investing in currencies, particularly new coins that make lofty promises. Many people faced lessons by relying on firms pledging stability in a volatile market.
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At Inspirepreneurs Magazine, covering entrepreneurship, business failures, and the human stories behind the world's most ambitious founders. She writes at the intersection of strategy and storytelling.
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