Original｜Odaily Planet Daily

Author: jk

On January 2, local time in the United States, Do Kwon, the former founder of Terra and co-founder of Terraform Labs, officially appeared in the public eye in the US court. At the hearing in the Manhattan Federal Court, Do Kwon pleaded not guilty and the case will officially enter the trial process.

Odaily previously reported that Montenegrin Prime Minister Milojko Spajic said on Tuesday that Montenegro has completed the extradition of Terraform Labs co-founder Do Kwon to the United States. Spajic posted on the X platform: "This extradition demonstrates our unwavering commitment to international justice and the rule of law."

Do Kwon faces prosecution in both New York and Seoul for the 2022 collapse of the $40 billion TerraUSD stablecoin. Last year, he was arrested in Montenegro for traveling on a forged passport. In April, Terraform and its founder Do Kwon were convicted of fraud following a civil trial over charges brought by the U.S. Securities and Exchange Commission (SEC). Terraform has agreed to pay $4.5 billion to settle with the SEC.

Background: Terra collapse, Do Kwon extradition and trial preview

Terra's Collapse

In May 2022, the Terra ecosystem experienced a collapse unprecedented in the entire history of cryptocurrency, with the value of its two core cryptocurrencies, TerraUSD (UST) and LUNA, almost dropping to zero, resulting in a loss of approximately $40 billion.

UST was the number one representative of algorithmic stablecoins at the time, maintaining a 1:1 peg to the US dollar through algorithms and market incentives, while LUNA was the governance token that supported UST's stability. However, in early May, with Terra's protocol upgrade and capital flight, UST lost its peg to the US dollar and its price fell rapidly, causing market panic. In response to this crisis, Terraform Labs tried to support the price of UST through reserves, but failed. At the same time, the dual-currency mechanism of the Terra protocol led to a large number of new LUNA being minted, further depressing the price of LUNA, forming a vicious circle.

Eventually, the price of LUNA plummeted from a high of about $119 to almost zero, and the entire ecosystem collapsed. At the same time, the collapse of Terra triggered a chain reaction in the market, affecting other cryptocurrencies such as Bitcoin and causing the funds of millions of investors to evaporate completely. Since then, algorithmic stablecoins have almost disappeared from the market, which has also directly led to the subsequent collapse of the primary market such as 3AC.

Extradition to the United States or South Korea?

Do Kwon was caught in a tug-of-war in the first half of this year: both the United States and South Korea wanted to try Do Kwon in their own countries. In March, it was revealed that Do Kwon would eventually be extradited to South Korea, but the decision was postponed by the Supreme Court of Montenegro, and finally confirmed in December that he would be extradited to the United States.

Previously, there were rumors that when Do Kwon was arrested by Montenegrin police, a Trezor hardware cold wallet was found in his rectum, which allegedly contained more than 10,000 Bitcoins. Today, these Bitcoins are worth more than $1 billion.

Source: X

A look ahead to the trial process

In court, Do Kwon pleaded not guilty to the charges against him. So what happens next?

Plead not guilty is a formal statement made by the defendant in a criminal case in the US judicial process, which means that he denies that he has committed the crime in question. This does not mean that the defendant is directly found not guilty, but requires the prosecution to provide sufficient evidence to prove the charges. The case will enter the trial stage, and the court will decide whether the defendant is guilty after the trial.

The case will be heard again on January 8.

In other words, we will witness a court drama similar to the SBF earlier this year. From the appearance of witnesses to the final verdict, many inside stories of Terra's collapse will be revealed. Odaily will continue to follow up on the report.

He could be sentenced to 130 years, but he smiled

Do Kwon was charged with multiple crimes. According to a news release from the U.S. Department of Justice’s Office of Public Affairs, the main charges against Do Kwon are as follows:

False Statements Made by Do Kwon:

  • Stablecoin Misrepresentation: Kwon falsely promoted the effectiveness of the “Terra Protocol” system, which purportedly used a computer algorithm to maintain the value of Terraform’s so-called “stablecoin” TerraUSD (UST) at $1-1 UST. But Kwon knew that after Terra Protocol failed to restore UST’s $1 peg in May 2021, he entered into an agreement with executives of a high-frequency trading firm for the firm to purchase large quantities of UST to artificially support UST’s $1 peg.

  • LFG Misrepresentations: Kwon misrepresented the governance of Luna Foundation Guard Ltd. (LFG), claiming that the organization was run by an independent governing body responsible for deploying billions of dollars in financial reserves to defend UST’s peg. But Kwon actually controlled LFG and Terraform, and misappropriated hundreds of millions of dollars in LFG assets.

  • Mirror Misrepresentations: Kwon falsely promoted the success of the Mirror protocol on the Terraform blockchain, which purportedly allowed users to create, buy, and sell synthetic versions of stocks listed on U.S. stock exchanges. However, Kwon and Terraform controlled Mirror and manipulated the prices of synthetic assets through automated trading bots.

  • Chai Misrepresentations: Kwon falsely claimed that the Terraform blockchain was used to process billions of dollars in financial transactions for South Korean payment app Chai, when in fact Chai used a traditional financial processing network.

  • Genesis Token Misrepresentation: Kwon used 100 million Genesis stablecoins originally intended for reserves for false transactions, including manipulating the price of Mirror assets.

“As we alleged, this fraud and the collapse of the Terraform cryptocurrency in May 2022 wiped out more than $40 billion in investor assets and caused devastating losses to countless investors in the United States and around the world,” said Daniel M. Gitner, U.S. Attorney for the Southern District of New York. “Kwon will now face justice in Manhattan federal court.”

But, according to Inner City Press, at a hearing today, "Do Kwon was chatting with one of his attorneys and smiling — clearly in a good mood."

Do Kwon enters the courtroom. Source: Inner City Press

Kwon also faces civil charges filed by the U.S. Securities and Exchange Commission (SEC) in February 2023, according to The Block. Terraform's lawsuit against the SEC went to trial in late March, but he did not participate. In April, a jury found Terraform and Kwon guilty of misleading investors and liable for civil fraud in violation of federal securities laws.

Kwon faces two counts of commodities fraud (each carries a maximum sentence of 10 years), two counts of securities fraud (each carries a maximum sentence of 20 years), two counts of wire fraud (each carries a maximum sentence of 20 years), two counts of conspiracy (each carries a maximum sentence of 5 years), and one count of money laundering conspiracy (each carries a maximum sentence of 20 years). If convicted of all charges, Do Kwon faces a maximum sentence of 130 years in prison, more than five times that of SBF.