Do Kwon Requests 5 Year Prison Sentence in TerraUSD Fraud Case

Terraform Labs co-founder Do Kwon has requested a prison term of no more than five years from a Manhattan federal court for his involvement in the fraud that triggered the 2022 collapse of the TerraUSD stablecoin. This development comes ahead of his sentencing hearing scheduled for December 11 before U.S. District Judge Paul Engelmayer. Kwon's legal team submitted the recommendation on November 26, arguing that the plea agreement's cap of 12 years exceeds what is required for accountability.

The TerraUSD debacle unfolded in May 2022, when the algorithmic stablecoin lost its peg to the U.S. dollar, leading to a rapid devaluation of its sister token Luna and erasing approximately $40 billion in market value. Investors worldwide suffered significant losses as the ecosystem unraveled, exposing vulnerabilities in algorithmic stablecoin designs that rely on complex balancing mechanisms rather than traditional collateral. Kwon, a South Korean entrepreneur who gained prominence in the crypto space for his bold takes, now faces the consequences of fraudulent statements about the project's stability.

Kwon pleaded guilty in August to charges of conspiracy to commit wire fraud and wire fraud, sparing himself a full trial after his extradition from Montenegro. There, authorities had detained him in March 2023 for using forged travel documents while evading charges in his home country. His defense attorneys say that he has already endured nearly three years in custody, including over 18 months in what they claim as harsh conditions in a Montenegrin facility, before his transfer to the United States in December 2024.

Defense Highlights Time Served and Ongoing Penalties

Kwon’s lawyers contend that the proposed five-year sentence fully addresses the gravity of his actions while considering the personal toll he has paid. According to Bloomberg, they point out that he has agreed to forfeit more than $19 million in assets, along with several properties, as part of the plea deal struck with federal prosecutors. This financial restitution, combined with his extended detention abroad, forms a substantial punishment that aligns with principles of restorative justice in white-collar cases.

The filing also underscores the unique challenges Kwon faces from parallel legal proceedings in South Korea, where he remains charged with violations of capital markets laws tied to the same events. Prosecutors in Seoul are pursuing a term of up to 40 years, creating a layered accountability that the U.S. court should weigh in its decision. By accepting responsibility early through his guilty plea, Kwon avoided prolonging the ordeal for victims and the judicial system, a factor his team believes warrants leniency.

Federal authorities have yet to submit their own sentencing memorandum, but the plea agreement limits their recommendation to no more than 12 years, reflecting a negotiated balance after Kwon's admissions in court. During his August plea hearing, Kwon expressed regret for concealing a 2021 arrangement with Jump Trading, which temporarily propped up TerraUSD's peg without public disclosure. He described his conduct as stemming from overconfidence and the pressures of leading a high-stakes venture, rather than deliberate intent to enrich himself personally.

How Terra’s Design Set the Stage for Crisis

Kwon’s path to this juncture began with Terraform Labs' launch of Terra in 2018, positioning it as a decentralized alternative to centralized stablecoins. TerraUSD (UST) was designed to maintain its dollar peg through an arbitrage mechanism rather than holding cash reserves. The system paired UST with Luna, a volatile governance token: when UST traded above $1, users could burn Luna to mint new UST, and when it fell below $1, they could burn UST to mint Luna, theoretically keeping the peg stable through profit-driven arbitrage. To attract capital, Terraform created Anchor Protocol, a lending platform that offered roughly 20% annual yields on UST deposits, funded largely by company reserves and investor subsidies rather than sustainable onchain activity.

As market conditions tightened in May 2022, large withdrawals from Anchor exposed the fragility of this model, and UST began trading slightly below its peg. What surfaced during the crisis was that the peg had previously been defended through undisclosed offchain arrangements, most notably a 2021 trading limit agreement with market maker Jump Trading that allowed Jump to buy large amounts of UST at exactly $1 whenever the peg wavered. When these hidden supports were overwhelmed by the scale of outflows and could no longer be sustained, confidence collapsed, arbitrageurs fled, and the death spiral accelerated as burning UST minted ever more Luna, driving its price toward zero and wiping out the mechanism that was supposed to restore the peg.

As the December 11 hearing approaches, stakeholders in the crypto space are watching closely to see how the U.S. judge determines the appropriate penalties. Under the plea agreement, prosecutors may recommend up to 12 years, while Kwon’s defense has asked for 5 years. The defense highlights his age at the time of the collapse, 31 years old, and his statements of remorse, along with time already served. Prosecutors’ forthcoming input may influence the outcome, while the defense emphasizes proportionality within the negotiated sentencing range.