U.S. Prosecutors Seek 12-Year Sentence for Terraform Founder Do Kwon in Crypto Fraud Case

U.S. federal prosecutors are seeking a 12-year prison sentence for Do Kwon, the founder of Terraform Labs, the firm behind the algorithmic stablecoin UST that imploded spectacularly more than three years ago.

The request, filed on Thursday to the judge of Southern District of New York, comes after Kwon pleaded guilty earlier this year. He admitted to defrauding investors and manipulating the crypto markets through a series of false claims about his company’s blockchain products.

While Kwon’s defense team requested a five-year sentence, citing time served in Montenegro and potential prosecution in South Korea, U.S. officials argued that only a lengthy prison term would reflect the scale of the fraud and deter similar conduct.

"The Terraform market crash triggered a cascade of crises that swept through cryptocurrency markets and contributed to what has since become known as 'Crypto Winter,' the prosecutors wrote. "Kwon fled from the wreckage and, while in hiding, dissembled in interviews and tweets, blamed others for what had happened, and, once found, resisted extradition."

"Kwon’s misconduct, the consequences of his crime, and his reaction to the discovery of his scheme all warrant a substantial prison term," they added. "Indeed, the circumstances of the offense, standing alone, would weigh strongly in favor of a maximum sentence."

Prosecutors said in the filing that losses tied to the Terraform crash surpassed those caused by the collapse of Sam Bankman-Fried's FTX, Alex Mashinky's Celsius and OneCoin combined.

Bankman-Fried is currently serving a 25-year prison sentence, while Mashinsky was sentenced to 12 years in prison for fraud.

Terra-Luna crash

The collapse of the Terraform ecosystem, which reached over $50 billion in market value at its peak, was a pivotal moment for the brutal crypto market downturn in 2022.

At the center of the ecosystem was the algorithmic stablecoin UST, which was backed by a balancing mechanism linked to crypto token LUNA, instead of more tangible assets such as short-term U.S. Treasuries, like most current stablecoins.

At the time, Kwon portrayed Terraform’s offerings as decentralized and technologically sound. However, the project relied on backdoor agreements, hidden trading activity and deceptive metrics to maintain its appearance of success, according to court filings.

Kwon's sentencing will take place on December 11 in Manhattan federal court.