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 at a 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 Milojko Spajic, the Prime Minister of Montenegro, stated on Tuesday that Montenegro has completed the procedures to extradite Terraform Labs co-founder Do Kwon to the United States. Spajic posted on the X platform, saying, "This extradition demonstrates our unwavering commitment to international justice and the rule of law."

Do Kwon faces lawsuits in both New York and Seoul due to the collapse of the TerraUSD stablecoin, which was valued at $40 billion in 2022. Last year, he was arrested in Montenegro for traveling with a forged passport. In April of this year, after a civil trial regarding charges from the US Securities and Exchange Commission (SEC), Terraform and its founder Do Kwon were found guilty of fraud. Terraform has agreed to pay $4.5 billion to settle with the SEC.

Background Information: The Collapse of Terra, Extradition of Do Kwon, and Trial Outlook

The Collapse of Terra

In May 2022, the Terra ecosystem experienced an unprecedented collapse in the history of cryptocurrency, with its two core cryptocurrencies, TerraUSD (UST) and LUNA, nearly losing all their value, resulting in approximately $40 billion in losses.

UST was the leading algorithmic stablecoin of that year, maintaining a 1:1 peg to the US dollar through algorithms and market incentives, while LUNA was the governance token supporting UST's stability. However, in early May, as Terra's protocol was upgraded and funds fled, UST lost its peg to the dollar, and its price plummeted, triggering market panic. In response to this crisis, Terraform Labs attempted to support UST's price through reserves but failed. Meanwhile, the dual-token mechanism of the Terra protocol led to the minting of a large amount of new LUNA, further depressing LUNA's price and creating a vicious cycle.

Ultimately, LUNA's price crashed from a high of about $119 to nearly zero, leading to the collapse of the entire ecosystem. At the same time, the collapse of Terra triggered a chain reaction in the market, affecting other cryptocurrencies like Bitcoin and causing the complete evaporation of funds for millions of investors. Subsequently, algorithmic stablecoins nearly disappeared from the market, directly leading to subsequent primary market collapses like that of 3AC.

Extradition to the US or South Korea?

Do Kwon was embroiled in a tug-of-war earlier this year: both the US and South Korea wanted to try Do Kwon domestically. In March, there were rumors that Do Kwon would ultimately be extradited to South Korea, but the decision was postponed by the Supreme Court of Montenegro, which ultimately confirmed in December that he would be extradited to the US.

Previously, there were rumors in the market that when Do Kwon was arrested by Montenegrin police, a Trezor hardware cold wallet was found in his rectum, allegedly containing over 10,000 Bitcoins. These Bitcoins are now worth over a billion dollars.

Source: X

Trial Outlook

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

Pleading not guilty is a formal statement made by a defendant in a criminal case in the US judicial process, meaning he denies committing the crimes charged. This does not mean the defendant is directly found not guilty; rather, it requires the prosecution to provide sufficient evidence to prove the charges, and the case will enter the trial phase, where the court will determine whether the defendant is guilty.

The case will reconvene on January 8.

This means we will witness a courtroom drama similar to that of SBF earlier this year, with many insider details about the collapse of Terra being revealed from witness testimonies to the final verdict. Odaily will continue to provide coverage.

Facing a possible 130-year sentence, he smiles

Do Kwon is facing multiple charges. According to a press release from the US Department of Justice's Office of Public Affairs, the main charges against Do Kwon are as follows:

False statements made by Do Kwon:

• False statements about the stablecoin: Kwon falsely promoted the effectiveness of the "Terra protocol" system, which allegedly used computer algorithms to maintain the value of Terraform's so-called stablecoin TerraUSD (UST) at $1 - 1 UST. However, Kwon knew that after the Terra protocol failed to restore UST's $1 peg in May 2021, he reached an agreement with an executive from a high-frequency trading firm for that firm to purchase large amounts of UST to artificially support UST's $1 peg.

• False statements about LFG: Kwon falsely promoted the governance of Luna Foundation Guard Ltd. (LFG), claiming that the organization was managed by independent entities responsible for deploying billions of dollars in financial reserves to defend UST's peg. However, Kwon actually controlled LFG and Terraform and misappropriated hundreds of millions of dollars in LFG assets.

• False statements about Mirror: Kwon falsely promoted the success of the Mirror protocol on the Terraform blockchain, which allegedly allowed users to create, buy, and sell synthetic versions of stocks listed on US exchanges. However, Kwon and Terraform actually controlled Mirror and manipulated the prices of synthetic assets through automated trading bots.

• False statements about Chai: Kwon falsely claimed that the Terraform blockchain was used to process billions of dollars in financial transactions for the South Korean payment application Chai, but in reality, Chai used traditional financial processing networks.

• False statements about founder tokens: Kwon used 100 million founder stablecoins originally intended for reserves for fraudulent transactions, including manipulating Mirror asset prices.

Daniel M. Gitner, the US Attorney for the Southern District of New York, stated, "As we have alleged, this fraudulent conduct and the collapse of Terraform's cryptocurrency in May 2022 wiped out over $40 billion in investor assets, causing devastating losses to countless investors in the US and globally. Kwon will now face justice in the Manhattan federal court."

However, according to Inner City Press, during the hearing, "Do Kwon was seen chatting with one of his lawyers, smiling—clearly in a good mood."

Do Kwon entering the courtroom. Source: Inner City Press

According to The Block, Kwon is also facing civil charges brought by the SEC in February 2023. The lawsuit between Terraform and the SEC began trial at the end of March, but he did not participate. In April, the jury found Terraform and Kwon misled investors, and held them liable for civil fraud, violating federal securities laws.

Kwon faces two counts of commodity fraud (each carrying a maximum of 10 years), two counts of securities fraud (each carrying a maximum of 20 years), two counts of wire fraud (each carrying a maximum of 20 years), two counts of conspiracy (each carrying a maximum of 5 years), and one count of money laundering conspiracy (carrying a maximum of 20 years). If all charges are upheld, Do Kwon could face a maximum of 130 years in prison, more than five times that of SBF.

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