Inside Do Kwon’s sentencing: ‘an extraordinary rise and fall’

When David Patton met Do Hyeong Kwon, the former billionaire crypto tycoon was shivering in a cold Montenegrin jail.

“My God, what an extraordinary rise and fall in a few short years,” Patton, Kwon’s defence attorney, thought.

On December 11, some two years after that first encounter, Patton recalled the meeting for a packed courtroom in New York City.

And he pleaded with a federal judge to show mercy to his client.

The entrepreneur had pleaded guilty to his crimes; he faces a separate, decades-long prison stint in his native South Korea; and, though he misled investors, he was no thief, according to Patton.

“Those false statements were not equal to a Ponzi scheme or a house of cards,” the attorney said of the lies Kwon had told investors.

He urged the judge to sentence Kwon to just five years in prison.

Instead, federal Judge Paul Engelmayer wanted to send a “graphic reminder” to future fraudsters.

He sentenced Kwon to 15 years in prison.

Terra’s investors, reminded Engelmayer, lost an estimated $40 billion when the blockchain imploded in May 2022.

Some lost millions of dollars. Some lost homes. Some contemplated suicide.

“Those are hard facts,” the judge said. “They demand a very long sentence.”

The December 11 sentencing is the culmination of a three-year-long saga that saw Kwon transform from one of the crypto industry’s wealthiest trailblazers into the fugitive target of an international manhunt and, now, as a convict facing over a decade in prison.

As part of a plea agreement with federal prosecutors, Kwon has agreed he would neither confirm nor deny prosecutors’ account of Terra’s collapse.

This is the story of Kwon’s rise and fall, as told in hundreds of pages of court documents reviewed by DL News.

Covering up the ‘death spiral’

Born and raised in Seoul, the South Korean capital, Kwon graduated from Stanford University in 2015. He was offered a full-time job at Microsoft, but instead moved home to start his own company.

In 2018, Kwon and a partner, Daniel Shin, launched Terraform Labs, pitching investors on a blockchain called Terra and a US dollar-pegged stablecoin, UST, that would be partly backed by fiat currency.

By the time the stablecoin launched in September 2020, his vision had changed.

The UST token was an algorithmic stablecoin — completely unbacked by the asset it was supposed to represent — maintaining its $1 value through an arbitrage mechanism tied to Terra’s governance token, LUNA.

This was how it worked: One UST token could always be swapped for $1 worth of LUNA, giving investors a reason to buy the stablecoin when it was worth less than $1 and a reason to sell when it was worth more than $1.

In the document detailing this design, Kwon acknowledged the possibility of a “death spiral.”

Less than a year after UST’s launch, that’s exactly what happened.

On May 23, 2021, UST fell to $0.92. To make matters worse, LUNA also dropped — so sharply, in fact, that it called the peg stability mechanism into question.

Desperate, Kwon turned to Kanav Kariya, the head of Jump Crypto, a trading firm that served as a market maker for UST and LUNA.

They struck a deal.

Jump would ultimately spend more than $20 million to purchase UST in an effort to bring its price back up to $1. In return, it was allowed to purchase LUNA from Terraform at a steep discount.

The scheme worked. UST returned to peg, and investors forgot about its near-death experience.

Between May 2021 and May 2022, the blockchain and its various tokens grew at breakneck speed. UST became the third-largest stablecoin.

Terra’s DeFi ecosystem was second only to Ethereum’s.

Lies

In public statements, Kwon suggested that UST had automatically returned to peg due to its elegant design.

When sceptics on social media questioned him, Kwon could be vicious.

“I don’t debate the poor on Twitter,” he said after Frances Coppola, a British economist, criticised the design of UST.

In private, he told a different story.

“If [Jump] had not stepped in, we might have been fucked,” he told Terraform’s former head of public relations, Brian Curran, according to court documents.

In a November letter to Judge Engelmayer, Kwon lamented his decision to cover up Jump’s intervention.

“May 2021 was sold and marketed as a successful experiment and a sole win for the stability mechanism, and that was wrong,” he wrote to the judge.

“I misled many investors into believing UST was a lot less experimental than it was, and made them unwitting participants in the ultimate failure of UST in May 2022.”

In January 2022, Kwon raised about $3 billion for the Luna Foundation Guard, a supposedly independent organisation charged with defending UST’s $1 peg.

Virtually everything he said about the organisation was a lie, prosecutors alleged.

He exercised full control over the Luna Foundation Guard and, when UST broke its peg again in May 2022, Kwon would divert hundreds of millions to Terraform Labs in order to cover some of the company’s expenses, rather than defend the peg.

Luna Foundation Guard wasn’t the only purportedly decentralised organisation that was, in reality, controlled by Kwon.

Despite what he said publicly, Kwon had substantial power in the cooperative that ran Mirror, a protocol that allowed users to mint and trade tokenised versions of traditional financial assets.

Chai, a South Korean payment processor Kwon launched in 2019, was another business that did not function as promised.

Hoping to demonstrate Terra’s real-world utility, Kwon insisted Chai used the blockchain to settle and record transactions — a source of revenue for Terra that would be routed to LUNA investors who staked their tokens. That would drive demand for LUNA and ensure it was valuable enough to serve its role in UST’s peg-stability mechanism.

In reality, Chai used banks to process its transactions. Kwon spoofed those transactions on Terra to create the illusion that Chai was, in fact, using the blockchain, according to prosecutors.

He used Terraform’s stash of stablecoins to pay LUNA stakers the yield they believed came partly from Chai.

On the run

Almost one year after Terra’s first brush with death, it happened again — UST fell below a dollar.

Terraform Labs and Luna Foundation Guard stepped in, using their considerable crypto holdings to purchase the stablecoin and restore its $1 peg.

Kwon took to X to assuage jittery investors.

“Deploying more capital — steady lads,” he wrote.

Those efforts were futile. Within days, UST and LUNA were virtually worthless, and the $40 billion ecosystem Kwon had built was vaporised.

Despite his guilty plea, Kwon has attempted to deflect blame to unnamed trading firms.

“They accomplished this through a coordinated pattern of trading that exploited weaknesses in the Terra Protocol,” his attorneys wrote Engelmayer in a November 26 letter.

That was beside the point, prosecutors said.

“Let it be clear: the half-truths, evasion, and outright lies were Kwon’s,” they wrote the judge earlier this month. “They cannot be diminished or excused by shifting blame.”

Given its prominence at the time, Terra’s collapse shook the industry to its foundations.

Crypto prices collapsed, and several multibillion-dollar businesses filed for bankruptcy, including crypto lender Celsius and crypto exchange FTX.

Their failures revealed that Celsius and FTX were also built on fraud, and their founders are now in prison.

For a while, it seemed Kwon would face few repercussions. Terra’s collapse was widely viewed as an experiment gone wrong, rather than a fraud perpetrated on unwitting investors.

But in September 2022, South Korean prosecutors filed criminal charges against the entrepreneur. Kwon travelled to Serbia on a private jet — “on the advice of [Terraform’s] outside counsel,” Patton told the judge in his November 26 letter.

In February 2023, as Kwon was working to revive his company, the US Securities and Exchange Commission sued him and Terraform for fraud.

In June 2024, they were found guilty and ordered to pay fines of $204 million and $4.4 billion, respectively.

Cigarette bribes

On March 23, 2023, US prosecutors charged Kwon with eight counts of fraud, with a ninth charge added this past January.

The same day, he was arrested in Montenegro attempting to use a fake passport to board a plane to the United Arab Emirates.

That won Kwon a four-month prison sentence. But he stayed in that Montenegrin prison for another 13 months as the US and South Korea fought for the right to extradite and prosecute him.

In his letter to the judge, Kwon recounted his time in Montenegro. He said he was kept in near-total isolation for the duration of his imprisonment, and didn’t understand that he had to bribe staff with cigarettes for supplies such as soap and toilet paper.

“Food, almost always some variation of gruel, also required payment for any portions greater than bare subsistence levels,” he wrote. “I tried to move as little as possible to conserve energy, even when rats scurried across my legs.”

Kwon wanted to go to South Korea, and his lawyers allege it would have happened had US officials not pressured their counterparts in Montenegro.

“Do’s efforts to be extradited to Korea, consistent with Montenegrin law, should have been successful,” his attorneys wrote.

“Instead, Montenegro’s Supreme State Prosecutor’s Office, presumably at the urging of the United States, took several ‘extraordinary steps’ to file and pursue unusual appeals.”

Kwon faced almost two years in which officials alternated between saying he’d be deported to the US and then to South Korea and then finally to the States.

He was finally brought to the US on December 31, 2024. Kwon appeared ready to fight the charges — a trial was scheduled for January 2026.

In August, however, he struck a deal with prosecutors and pleaded guilty to two counts of fraud.

In exchange, prosecutors promised not to seek a prison sentence exceeding 12 years.

They also would not oppose an application to serve the latter half of his sentence in South Korea, where he would be closer to his parents, his wife, and his four-year-old daughter.

In court

On Thursday, federal prosecutor Sarah Mortazavi opened her case for a 12-year sentence by noting that the collapse of Terra left many of its investors “severely depressed, devastated, drowning in debt.”

Moreover, letters to the court from Kwon and his attorneys amounted to a “sanitised counter narrative” in which his only crime was that he kept mum after Jump intervened in 2021, Mortazavi said.

When it was his turn, Patton admitted that a request for just five years in prison was unusual, given the amount of money that was lost when Terra collapsed.

But Kwon’s potential prosecution in South Korea was “an enormous part of the story here,” the attorney said.

South Korean prosecutors have charged Kwon with commodities fraud and capital markets fraud, and the specifics of those charges are nearly identical to the charges he faced in the US.

Due to differences in the two jurisdictions’ sentencing practices, however, time served in the US won’t count towards a sentence in South Korea, according to Patton. And that sentence could top 40 years.

“There’s every reason to believe he’s going to be treated quite severely,” Patton said.

Engelmayer was seemingly unmoved by that argument.

“It’s their business how they sentence him,” the judge said.

Nor did Engelmayer believe that the South Korean legal system was “so hidebound, so primitive, so inflexible” that it would not take into account the time that Kwon had already served if it were to dole out its own sentence for the very same crimes.

At one point, Engelmayer asked whether there had been any political interference in Kwon’s criminal case, an apparent reference to US President Donald Trump’s personal interest in the crypto industry.

Patton insisted he had not communicated with anyone outside the prosecutor’s office with respect to Kwon’s case.

The victims

The judge began the hearing by offering to delay sentencing.

It wasn’t until December 1 that prosecutors had notified victims they could provide statements to the court, and the judge had received 315 letters in the preceding 24 hours, forcing him to cancel a celebratory function and stay up past midnight reading, he said.

Kwon insisted he did not want to delay his sentencing. On Thursday, he heard directly from some of his victims.

Tatiana Dontsova, calling in and speaking through translator Andrew Harkuscha, said she had sold her house in Moscow and converted the $81,000 to UST, which she would use to finance a move to Tbilisi, Georgia.

When Terra collapsed, her UST fell to $13. The 58-year-old woman said she now wanders the streets of Tbilisi, homeless.

Chauncey St. John, the founder of a business formerly known as Angel Protocol, appeared in person and recounted how he had invested money in Terra on nonprofits’ behalf.

St. John said he wouldn’t have kept his money in Terra had he known the peg failed in 2021.

When UST dipped below $1 in May 2022, he personally reached out to Kwon.

“He told me to get out what I could,” St. John recalled. “But it was already too late.”

Those nonprofits lost tremendous amounts of money when Terra collapsed.

He personally lost more than $1 million. Worst of all, his in-laws lost money they had pulled from their retirement accounts, and are now planning to work well into their old age.

When it was his turn to speak on Thursday, Kwon apologised to his victims and said it was difficult listening to their stories.

“All of their stories were harrowing and reminded me of the great losses that I’ve caused,” he said.

The sentence

As Engelmayer prepared to announce his sentence, it became clear he would not err on the side of leniency.

Five years was “utterly unthinkable and wildly unreasonable,” given the magnitude of Kwon’s crimes, he said.

In fact, even 12 years would be “unreasonably lenient.”

“This was a fraud on an epic, generational scale,” the judge said.

Kwon’s central lie was that he had solved a heretofore unsolved problem by creating a functioning algorithmic stablecoin, according to the judge.

“That was not true, and you knew it,” he said.

When the peg failed in 2021, Kwon had a choice: to admit his failure, or to double down on the lie.

“To state the obvious, you chose poorly,” the judge said. “You chose the path of fraud.”

The judge was particularly incensed by Kwon’s arrogant public persona in the wake of the 2021 depeg event, pointing to his “I don’t debate the poor” post on Twitter.

“I find that moment revealing about who you truly are,” Engelmayer said.

Of the 315 victim letters, six came from people who said they had considered suicide after Terra collapsed.

But some came from people who, to this day, support Kwon, calling him a visionary who had tried something bold and failed.

Engelmayer said those letters were just more evidence of the success of Kwon’s fraud.

“These letters read like they come from a fan club,” the judge said, “cult followers for whom the Kool-Aid hasn’t yet worn off.”

Still, he added, letters from friends and family revealed a remarkably bright and caring person who still had much to offer the world.

And then he said he would sentence Kwon to 15 years in prison, with the 17 months in Montenegro counting toward that sentence.

“Your offenses, Mr. Kwon, are simply that serious,” the judge said.

Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can reach him at [email protected].