- Prosecutors seek a 12-year term, calling the TerraUSD collapse a major fraud.
- Defense argues external market forces contributed to UST’s failure.
- Kwon faces sentencing after a guilty plea and extradition complications.
Federal prosecutors have asked a New York judge to impose a 12-year prison sentence on Terraform Labs co-founder Do-hyung Kwon, arguing that the collapse of TerraUSD amounted to a “colossal fraud” with consequences that rippled across the digital-asset market. The sentencing request, detailed in a new filing, marks one of the most consequential moments in a case tied to the collapse of an ecosystem that erased an estimated $40 billion and helped accelerate instability throughout the sector.
In the latest court submission, filed December 4, the U.S. government said Kwon misled users by repeatedly asserting that TerraUSD (UST) would remain pegged to $1, despite internal concerns about structural weaknesses. Prosecutors linked the stablecoin’s failure in May 2022 not only to massive losses among Terra holders but also to strain across the broader market, stating that it played a role in the pressure that later led to firms such as FTX.
The filing stated that Kwon’s conduct created conditions for a market shock, wiping out billions within days and leading to a wave of downstream failures. Investigators told Judge Paul Engelmayer that Kwon’s public assurances concealed key information about UST’s stability, adding that the scale of financial harm warrants a sentence at the top of the agreed-upon cap.
Related: Do Kwon’s Lawyers Argue He Should Receive No More Than a 5-Year Prison Sentence
Kwon pleaded guilty in August to conspiracy and wire fraud under a plea agreement that limited the possible prison time to no more than 12 years. He also agreed to forfeit $19.3 million and certain properties. Prosecutors declined to seek restitution, citing the challenge of accurately calculating losses affecting millions of users.
Defense Seeks Reduced Term, Citing External Market Forces
Kwon’s legal team urged the court to impose a sentence closer to five years, arguing that the TerraUSD implosion cannot be attributed solely to their client. In filings last week, they cited alleged targeted attacks by traders, the exploitation of known vulnerabilities by other firms, and pre-existing market stress as contributing factors. The defense submitted research and blockchain analysis materials in support of its argument.
Kwon, who faced charges in the U.S. since March 2023, was handed over in January after serving nearly two years in Montenegro for attempting to travel on a falsified passport. U.S. officials indicated that they would support his transfer to South Korea for the latter part of his sentence, contingent upon compliance with the plea agreement and eligibility under prisoner-transfer procedures.
Related: Do Kwon Pleads Guilty to Fraud Charges in $40 Billion Terra LUNA Collapse Case
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