Do Kwon Faces Sentencing for Crypto Collapse
Do Kwon was the central figure behind two digital currencies that ultimately collapsed, resulting in a staggering loss of $40 billion. He is set to be sentenced to 15 years in prison, a decision made after a judge characterized his actions at Terraform Labs as an “epic fraud” on an unprecedented scale.
In 2018, South Korean entrepreneurs Daniel Shin and Do Kwon introduced the Terra blockchain, initially aimed at creating a stablecoin tied to traditional currencies. The project began with TerraKRW, linked to the South Korean won, but shifted focus to TerraUSD (UST) in 2020. UST was an algorithmically designed stablecoin meant to maintain a value of $1, backed by LUNA, the native cryptocurrency of the Terra blockchain, rather than typical reserve assets. The stability of UST relied on an automatic mechanism that adjusted supply based on its price fluctuations.
Decentralized stablecoins have long been seen as the “holy grail” in cryptocurrency. Yet, as the fate of UST illustrates, achieving this goal is more complicated than it appears, often challenging to manage while keeping decentralization intact.
The burgeoning popularity of UST significantly boosted the value of LUNA, as UST was essentially supported by LUNA collateral. With the DeFi trend gaining traction in 2021, LUNA’s value surged, attracting billions in investments. The Terra ecosystem garnered attention through its lending service, Anchor Protocol, which promised near 20% annual returns on UST deposits. By early 2022, UST’s market cap hit $10 billion, making it the third-largest stablecoin after USDT and USDC.
Eventually, that alluring 20% yield on UST holdings proved unsustainable. A sort of bank run occurred as the cryptocurrency market faced a downturn, causing the entire system to collapse. In an effort to manage the fallout, LUNA faced hyperinflation, attempting to bail out users looking to escape UST’s decline. As often seen with failed cryptocurrencies, the striking gains touted by the Anchor protocol turned out to resemble a deceptive Ponzi scheme.
The abrupt collapse eradicated $40 billion in value in just a week, severely impacting retail investors while savvy players exited early. Do Kwon, the public face of the initiative, managed to evade legal consequences for a time, facing multiple fraud charges that culminated in his arrest in Montenegro in 2023.
Notably, the downfall of UST and LUNA was part of a broader unraveling in the crypto world, revealing vulnerabilities in other significant players in the market. This breakdown also coincided with the notorious collapse of the FTX exchange in November 2022.
The Human Cost of the Collapse
At Kwon’s sentencing in Manhattan federal court, victims of the Terra collapse shared the personal impacts of the $40 billion disaster. Chauncey St. John, founder of a nonprofit initiative, articulated the sorrow felt by numerous organizations reliant on Terra. He detailed a loss of $1 million that diminished his family’s retirement savings, forcing him to cancel projects across Africa and repay donors. Following Kwon’s infamous tweet amid UST’s decline, he sought advice but felt he acted too late to salvage anything. Despite his feelings of betrayal, he found it in himself to forgive Kwon.
Others expressed their pain. Jake Collis spoke of the personal loss of a dear friend, noting that Kwon’s ruling wouldn’t resolve the underlying issues. Stanislav Erofimtuk recounted how he lost $190,000 due to the implosion, leading to severe personal consequences, including a divorce. He noted plainly, “He destroyed my family,” citing Kwon’s actions as the direct cause of his suffering.
Tatyana Dontsova relayed her harrowing transformation from property owner in Moscow to living on the streets. At 58, she cashed in her apartment with $81,000 equity, only to see it shrink to $13 after UST collapsed. Now in Tbilisi, she faces homelessness, untreated illness, and has battled depression for years.
In addition to personal testimonies, Judge Paul Engelmayer received 315 letters from investors worldwide. Some shared devastating stories of losing significant sums, with one individual losing $62,000 on what was marketed as a “low-risk” investment. Other parents revealed their inability to provide for their children following the crisis.
During sentencing, Kwon asserted his belief in the vision behind Terra. Whether or not that’s true, the fallout for those affected remains the same when the system fails.
