Do Kwon Sentenced to 15 Years for $40 Billion Crypto Collapse

Do Kwon, a central figure in the collapse of two digital currencies, was sentenced to 15 years in prison. The sentencing took place on Thursday, with the judge describing Kwon’s actions at Terraform Labs as an “epic fraud.” The fallout from Kwon’s schemes led to a staggering $40 billion loss in the cryptocurrency market.

Background of Terra’s Collapse

In 2018, Do Kwon and South Korean entrepreneur Daniel Shin introduced the Terra blockchain. Initially designed to create stablecoins pegged to fiat currencies, the platform shifted focus to TerraUSD (UST) by 2020. UST was an algorithmic stablecoin intended to maintain a value of $1, relying on LUNA, the native cryptocurrency of the Terra ecosystem.

Mechanics of UST

The stability of UST was maintained through automated mechanisms that adjusted supply. When UST’s price fell below $1, supply tightened, and when it rose above $1, supply expanded. This model garnered immense interest in the cryptocurrency community, particularly through the Anchor protocol, which promised nearly 20% annual yields on UST deposits.

By early 2022, UST reached a market cap of $10 billion, making it the third-largest stablecoin after USDT and USDC. However, the promised yields proved unsustainable, leading to a bank run as the broader crypto market experienced a downturn.

The Aftermath

The collapse wiped out approximately $40 billion in value within a week. Retail investors bore the brunt of these losses as larger players exited the market early. Kwon, facing fraud charges in multiple jurisdictions, went into hiding before being arrested in Montenegro in 2023. His case highlighted a broader deleveraging in the cryptocurrency space, which included the infamous collapse of the FTX exchange in November 2022.

Impact on Victims

During the sentencing, victims of the collapse shared their personal stories. Chauncey St. John, founder of the Angel Protocol, lamented a $1 million loss that impacted his charitable projects. He recounted the emotional turmoil after Kwon’s misleading assurances.

• Jake Collis shared his pain over the loss of a close friend linked to the crash, stating Kwon’s actions destroyed hopeful blockchains.
• Stanislav Erofimthuk described how a $190,000 investment for a safe yield led to personal tragedy, including divorce.
• Tatiana Dontsova revealed her descent from property owner to near-homelessness after investing $81,000 with Kwon, leaving her in despair.

In total, Judge Paul Engelmayer received 315 letters from investors detailing their losses. Many expressed deep anguish over their financial situations, with some even contemplating suicide after losing life savings.

Conclusions

During his sentencing, Kwon asserted that he believed in the potential of the Terra project. However, the widespread destruction felt by investors suggests that whether or not he believed in his project, the consequences were devastating. The case will likely serve as a cautionary tale within the cryptocurrency space.