Do Kwon Sentencing: U.S. Seeks 12 Years for Terra's $40 Billion Collapse

Federal prosecutors are requesting a 12-year prison sentence for Do Kwon, co-founder of Terraform Labs, for his role in the fraud that led to the devastating $40 billion collapse of TerraUSD in 2022.

Key Takeaways

Federal prosecutors are seeking a 12-year prison sentence for Do Kwon for his role in the TerraUSD collapse.
Kwon pleaded guilty in August to conspiracy and wire fraud charges.
The Justice Department highlighted the systemic damage his actions caused within the broader cryptocurrency market.
Disparities in sentencing practices for fraud cases have sparked debate among legal experts.
Kwon's sentencing is scheduled for December 11, and he currently faces additional charges in South Korea.

Do Kwon Sentencing: US Wants 12 Years for Terra's $40 Billion Crash

According to Bloomberg, in a filing to U.S. District Judge Paul Engelmayer, the government characterized Kwon's actions as “colossal in scope”, pointing out how his fraud resulted in significant market failures that eventually played a part in the downfall of FTX.

Kwon's sentencing is scheduled for December 11, with his defense team suggesting a sentence of just five years.

The 34-year-old South Korean entrepreneur pleaded guilty in August to conspiracy and wire fraud charges, with an agreement that sets prosecutorial recommendations at a maximum of 12 years. However, the legal maximum for his involvement in the algorithmic stablecoin fraud could reach up to 25 years.

Do Kwon Sentencing

Prosecutors Point Out Market-Wide Damage

The Justice Department's memorandum for sentencing highlights that Kwon’s deceptive statements to consumers ignited a domino effect throughout cryptocurrency markets.

Prosecutors specifically mentioned how the collapse of Terra contributed to the downfall of FTX, indicating that the damage went far beyond just the losses of Terra's immediate investors.

In court, Kwon admitted that from 2018 to 2022, he “knowingly agreed to participate in a scheme to defraud purchasers of cryptocurrencies” connected to Terraform Labs. He acknowledged misleading investors about the mechanisms for restoring TerraUSD’s peg and failing to disclose Jump Trading’s secret involvement in sustaining the stablecoin during a depegging event in May 2021, which predicted the larger incident.

This case's timing is also notable since the current administration has softened the stringent actions against the cryptocurrency sector that were implemented during Trump's presidency.

Recently, former President Trump pardoned Binance's founder, Changpeng Zhao, after he faced a conviction related to failures in anti-money laundering programs at the world's largest cryptocurrency exchange. The administration defended this decision as being given “utmost seriousness.”

Defense Highlights Previous Detention and Dual Legal Action

Kwon’s legal representatives argue that his nearly three years spent in what they describe as “brutal conditions in Montenegro” should weigh heavily in the sentencing.

They contend that a longer prison term would be “far greater than necessary” to achieve justice, especially considering the significant punishment he has already endured during extended detention overseas.

The defense also pointed out Kwon's agreement to forfeit over $19 million and several properties as part of the plea deal reached with prosecutors in New York.

Additionally, Kwon is expected to stand trial in South Korea for the same conduct, where prosecutors are seeking a 40-year sentence, which may affect the outcome of the U.S. sentencing.

Importantly, prosecutors are not seeking restitution for the millions of investors who lost $40 billion, citing the difficulty of determining individual losses across diverse global markets.

U.S. authorities have indicated their willingness to allow Kwon to serve the latter part of his sentence in South Korea if he adheres to the terms of his plea agreement and qualifies under international transfer programs.

Disparities in Sentencing Raise Concerns

The different approaches to sentencing in major cryptocurrency fraud cases have raised questions about the fairness of punishments.

Sam Bankman-Fried received a 25-year sentence, along with an $11 billion restitution order, after being convicted of all charges at trial. However, reports suggest that four years may have been subsequently reduced from his sentence.

Kwon's guilty plea has notably reduced his potential penalties, despite the Terra collapse involving a $40 billion loss, significantly larger than FTX’s $8 billion fraud.

Legal experts have stated that federal sentencing guidelines for fraud of this magnitude usually suggest ranges approaching life imprisonment before any statutory limits. Thus, Kwon's request for only five years appears to face significant challenges.

The judge presiding over Kwon's case, Engelmayer, is known for strict rulings in financial fraud cases. Most observers predict sentences between 15 to 20 years, given the massive impact on victims.

The hearing on December 11 will reveal whether cooperating through guilty pleas results in reduced punishments compared to trial convictions, as seen in Bankman-Fried’s case.

Kwon was arrested in Montenegro in March 2023 while using a fake passport, which set off a lengthy extradition dispute between U.S. and South Korean officials. He spent nearly two years in detention in Montenegro before being sent to the U.S. in January, where his case has gained significant attention, becoming one of the most closely monitored legal events in the brief history of cryptocurrency.