Terraform Labs co-founder Do Kwon is requesting a maximum five-year prison sentence for his role in the $40 billion collapse of the TerraUSD stablecoin, arguing that nearly three years already spent behind bars—including extended periods in what his lawyers describe as harsh Montenegrin conditions - should count toward a lighter sentence.
The former CEO's legal team filed the sentencing recommendation Wednesday with the Southern District of New York, contending that prosecutors' anticipated 12-year recommendation represents punishment "far greater than necessary" to achieve justice.
Kwon pleaded guilty in August to conspiracy to defraud and wire fraud, avoiding trial after being extradited from Montenegro where he was arrested in March 2023 for attempting to travel with forged documents.
U.S. District Judge Paul Engelmayer is scheduled to hand down Kwon's sentence on December 11 in Manhattan.
The statutory maximum reaches 25 years for his role in the algorithmic stablecoin fraud that wiped out tens of billions in investor value during May 2022, though prosecutors previously agreed not to seek more than 12 years under the plea deal terms.
What Happened
Kwon's lawyers emphasized that he has spent nearly three years in custody, with more than half that time in "brutal conditions in Montenegro." The defense argued that the Terraform co-founder has "suffered substantially for his crimes" and stressed that he still faces trial in South Korea for the same conduct, where local prosecutors are seeking a prison term of up to 40 years.
"I made false and misleading statements about why it regained its peg by failing to disclose a trading firm's role in restoring that peg," Kwon told the court during his August guilty plea. "What I did was wrong."
The Terra founder admitted between 2018 and 2022 he knowingly agreed to participate in a scheme to defraud purchasers of cryptocurrencies from Terraform Labs. He acknowledged making false statements about how TerraUSD's peg was restored and concealing the role of Jump Trading in secretly propping up the stablecoin during a May 2021 depeg event.
As part of the August plea deal, Kwon agreed to forfeit more than $19 million and multiple properties. Court records showed that Kwon held 92 percent of Terraform Labs during the time of the alleged misconduct. The plea deal in the criminal case came after a civil judgment concluded against him in federal court.
Following the collapse of Terraform Labs, both South Korean and U.S. authorities sought to bring Kwon to justice. He had been on the run for months, fleeing his home country and Singapore ahead of the company's downfall. In March 2023, Montenegrin authorities detained him along with Terraform Lab's former finance officer Han Chang-joon at Podgorica Airport.
Kwon remained under Montenegro's custody for over a year and a half, facing an initial four-month sentence for passport fraud that was later extended by two months at the request of the United States and South Korea. The two countries entered a prolonged battle over extradition rights, with Montenegro initially approving South Korea's request before ultimately extraditing Kwon to the United States on December 31, 2024, after the interior ministry signed the American request.
Kwon initially pleaded not guilty in January to a nine-count indictment charging him with securities fraud, wire fraud, commodities fraud and conspiracy to commit money laundering. He changed his stance in August, pleading guilty to two of the nine charges as part of the negotiated plea agreement.
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Why It Matters
The Terra collapse in May 2022 marked one of the most catastrophic events in cryptocurrency market history. The TerraUSD algorithmic stablecoin and its sister token LUNA collapsed over three days, erasing approximately $45 billion in market capitalization and contributing to hundreds of billions more in losses across the broader crypto market.
At their peak in April 2022, TerraUSD was the third-largest stablecoin with a market cap of $17.5 billion, with approximately 75 percent deposited into the Anchor Protocol to earn rewards. LUNA was valued at $117, with a total market cap of more than $40 billion. The collapse triggered a domino effect of bankruptcies including Three Arrows Capital, Voyager Digital, Celsius Network, Genesis Asia Pacific, BlockFi, Alameda Research and FTX.
The Terra ecosystem relied entirely on UST maintaining its dollar peg through an algorithmic relationship with LUNA. When UST dipped below $1, the protocol would burn UST and mint LUNA to restore parity. When UST rose above $1, it would mint UST while burning LUNA. This delicate balance collapsed in May 2022 when initial downward price pressure triggered a "death spiral" where LUNA's supply exploded from roughly 350 million tokens to more than 6.5 trillion, causing its value to crash from $80 to $0.0001 in mere days.
The downfall began when large withdrawals from Anchor Protocol and market sales of UST put pressure on the peg. On May 7, 2022, a whale watching bot revealed that 85 million TerraUSD were swapped for USDC. UST fell to $0.98 on May 8, then plunged to $0.70 within 24 hours. Arbitrage mechanisms failed to restore stability as panic spread, with UST dropping below $0.30 by May 10-12.
Kwon's sentencing arrives as former FTX CEO Sam Bankman-Fried pursues appeals of his 25-year sentence for the $8 billion FTX collapse. Bankman-Fried's legal team argues he was "presumed guilty" from the outset and denied a fair trial. The two cases represent a significant shift in how authorities treat crypto misconduct - no longer as market failure but as criminal responsibility.
The sentencing debate will determine whether cooperation through a guilty plea significantly reduces punishment compared to trial conviction. Judge Engelmayer retains final discretion over the sentence regardless of prosecutorial recommendations or defense requests. The government is expected to file its own sentencing recommendation before the December 11 hearing.
Even if the judge grants a lighter sentence, Kwon's legal troubles will not end in Manhattan. South Korean prosecutors want him transferred to Seoul once the American process concludes, seeking a far harsher penalty of up to 40 years in prison. The timeline for when or whether he will be transferred remains unclear, though South Korea has repeatedly reiterated its request to take custody once the U.S. case concludes.
The dual prosecution imposes additional consequences that defense lawyers argue should factor into the American sentence, particularly given the overlap in allegations across both jurisdictions. Kwon is expected to serve part of his U.S. sentence in South Korea based on a transfer program agreement, though he must complete half of his sentence in American custody before qualifying for transfer.
The Terra collapse continues to drive legal pressure on major crypto figures and has contributed to intensified regulatory scrutiny on algorithmic stablecoins and decentralized finance protocols. The Securities and Exchange Commission filed a lawsuit against Terraform Labs in February 2023, reaching a tentative settlement in May 2024 that formalized a nearly $4.5 billion payment in June 2024.
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