Do Kwon, the South Korean cryptocurrency entrepreneur behind the 2022 collapse of Terraform Labs’ digital assets, including the TerraUSD and Luna tokens, pleaded not guilty to U.S. criminal fraud charges on Thursday. Kwon, 33, was extradited from Montenegro earlier this week and appeared before a Manhattan federal court to face a nine-count indictment.
Federal prosecutors in Manhattan have charged Kwon with securities fraud, wire fraud, commodities fraud, and conspiracy to launder money, following the devastating loss of approximately $40 billion in market value in the crypto market last year. Kwon co-founded Terraform Labs, the Singapore-based company that developed TerraUSD (a so-called stablecoin) and Luna, a cryptocurrency that was closely tied to TerraUSD.
At a hearing before U.S. Magistrate Judge Robert Lehrburger, Kwon appeared in an olive-green shirt and black sweatpants, as his lawyer, Andrew Chesley, entered a not guilty plea on his behalf. The court ordered Kwon detained, with his next court appearance scheduled for January 8. The defense indicated that they would not seek bail at this time.
In addition to the criminal charges, Kwon had previously settled with the U.S. Securities and Exchange Commission (SEC) in June 2023, agreeing to pay an $80 million fine and accept a ban on participating in crypto transactions as part of a $4.55 billion settlement. The SEC’s civil case accused Kwon and Terraform Labs of misleading investors about the stability and value of TerraUSD.
The new indictment unsealed on Thursday alleges that Kwon misrepresented the functionality of the “Terra Protocol,” a computer algorithm that was supposed to keep TerraUSD pegged to the value of $1. Prosecutors claim Kwon falsely told investors that the algorithm had restored the coin’s value when it dipped below $1 in May 2021, but in reality, he arranged for a high-frequency trading firm to buy millions of dollars worth of TerraUSD to artificially inflate its value.
The false claims, prosecutors argue, led both retail and institutional investors to purchase Terraform’s products, including Luna, which briefly reached a value of $50 billion by spring 2022. However, when TerraUSD’s value began to drop again in May 2022, the trading firm allegedly warned that propping up the coin would not be as simple as before. TerraUSD and Luna crashed, triggering a broader collapse in the cryptocurrency market and causing substantial losses across the digital asset space.
Though prosecutors did not identify the trading firm involved, SEC lawyers have previously indicated that Jump Trading was involved in propping up TerraUSD in May 2021. Jump Trading did not immediately respond to requests for comment.
In a related legal matter, Kwon and Terraform Labs were found liable last April for defrauding cryptocurrency investors in a federal trial. Terraform’s legal defense had argued that the company was transparent about its products and operations, even amid the failure of its crypto tokens. Kwon did not attend the trial as he was detained in Montenegro in March 2023 on forgery charges. He was handed over to U.S. authorities on Tuesday at the airport in Podgorica.
Terraform Labs, which filed for bankruptcy in January 2023, is among several crypto companies to face legal action following the significant downturn in digital currency values in 2022. Kwon joins a growing list of cryptocurrency figures facing federal charges in the wake of the crypto market’s turbulence. Notably, Sam Bankman-Fried, the founder of the FTX exchange, is appealing his conviction after being sentenced to 25 years in prison for defrauding customers out of $8 billion. Alex Mashinsky, the founder of the Celsius Network, pleaded guilty to fraud charges last month.
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