Terraform Labs' Cofounder Confesses to Alleged $40 Billion Scam in Federal Courtroom

Do Kwon, the founder of Terraform Labs, has pleaded guilty to two federal charges in Manhattan federal court in connection with a cryptocurrency fraud estimated at around $40 billion. Kwon, who has been in custody since his extradition from Montenegro late last year, faces a maximum 25-year prison sentence.

The fraud revolves around TerraUSD, a stablecoin that was designed to maintain a consistent $1 value. However, in May 2021, TerraUSD temporarily lost its dollar peg. To conceal the deception, Kwon falsely attributed the recovery to an automated computer algorithm called "Terra Protocol." Instead of revealing the truth, he secretly arranged a high-frequency trading firm to buy millions of dollars worth of TerraUSD token to prop up its price.

The scheme helped fuel massive investment in Terraform's products, with the value of Luna, a related cryptocurrency, reaching $50 billion by spring 2022. However, the Terra ecosystem collapsed in May 2022, wiping out tens of billions in investor funds.

Prosecutors allege that Kwon lied to investors about the stability mechanisms behind TerraUSD. They indicated that they would not oppose Kwon's potential transfer to South Korea after serving half his U.S. sentence, as Kwon faces criminal charges in South Korea as well.

Under his plea agreement, Kwon has agreed to pay $80 million in civil penalties to securities regulators. The government agreed to seek no more than 12 years if Kwon continues cooperating. Kwon's sentencing is scheduled for December 11.

During Tuesday's hearing, Kwon acknowledged his false statements about the stablecoin's price recovery mechanism. Prosecutors claim that this fraud is among the largest in history. Kwon previously accepted responsibility for the cryptocurrency fraud.

The collapse of TerraUSD has raised concerns about the stability of other stablecoins and the regulatory oversight of the cryptocurrency industry. As Kwon awaits sentencing, the impact of his actions continues to be felt in the world of cryptocurrency.

Terraform Labs' Cofounder Confesses to Alleged $40 Billion Scam in Federal Courtroom