Crypto Entrepreneur Do Kwon Pleads Guilty to Fraud Charges Stemming From Crypto Crash — WSJ
By Caitlin Ostroff, Sam Kessler and Alexander OsipovichDisgraced cryptocurrency tycoon Do Kwon pleaded guilty to two criminal counts of fraud on Tuesday in connection with the $40 billion crash of his TerraUSD and Luna coins in 2022.In exchange for Kwon's plea, federal prosecutors agreed to not seek a prison sentence of more than 12 years, and dropped seven other counts against him. Kwon's sentencing hearing is scheduled for Dec. 11. On Tuesday, Judge Paul A. Engelmayer reiterated that the crypto entrepreneur still faces as many as 25 years of prison.Kwon, who founded the crypto firm Terraform Labs, pleaded guilty to one count of wire fraud and one on conspiracy to commit wire fraud, securities fraud and commodities fraud."I knowingly agreed with others to engage in a scheme to defraud — and indeed, in fact, did defraud — purchasers of cryptocurrency issued by my companies," Kwon, clad in a yellow jumpsuit, read from a statement during Tuesday's appearance in Manhattan's federal courthouse.Tuesday's guilty plea capped off the downfall of a brash entrepreneur who was among the biggest cheerleaders of digital currencies during the 2021-22 bull market. Born in South Korea and educated at Stanford University, Kwon hyped TerraUSD, a stablecoin, as the future of money and derided his critics in social-media posts — until it all came crashing down and he went into hiding in the Balkans.As part of their criminal case against Kwon, federal prosecutors alleged that the crypto founder misrepresented TerraUSD's autobalancing features — the algorithm that supposedly kept TerraUSD at $1 without any external intervention. In one instance in 2021, prosecutors alleged, Terraform relied on market buys from a trading firm to keep the token afloat.Kwon admitted on Tuesday that he had misrepresented TerraUSD's pricing algorithm, stating that he made "false and misleading statements" about the 2021 depegging and "failed to disclose the role of a trading firm" in restoring it. "I understood at the time that the statements were false, and that making them could be illegal," he said. The trading firm has been identified in other court proceedings as Chicago-based Jump Trading.Federal prosecutors have said that the number of victims of Kwon's actions may top one million worldwide.Earlier this year, Kwon had pleaded not guilty to the charges. He still faces similar charges in South Korea.TerraUSD was a so-called algorithmic stablecoin designed to maintain a price of $1, although it wasn't backed by dollars or Treasury bills like conventional stablecoins. Instead, if TerraUSD fell below its peg, traders were motivated to swap it for sister token Luna, a process designed to lift the stablecoin's price back to $1. Stablecoins have emerged as a staple in the cryptocurrency markets, enabling investors to trade in and out of positions and move money around the world.Some crypto executives warned that TerraUSD was a risky design and that both tokens were vulnerable to a ruinous "death spiral." Still, investors poured billions of dollars into TerraUSD and Luna. Many small investors were drawn by promised annual returns of nearly 20% and by prominent backers such as Galaxy Digital founder Michael Novogratz, who even got a Luna-inspired tattoo on his arm.Earlier this year, Galaxy paid $200 million to resolve an investigation by New York's attorney general into the firm's promotion of Luna. Galaxy didn't admit wrongdoing.TerraUSD lost its peg in May 2022 and never recovered, while Luna lost more than 99% of its value in a few days. The crash ended the previous bull market in digital currencies, unleashing a chain reaction in which one crypto firm after another toppled into bankruptcy. The fallout ultimately ensnared Sam Bankman-Fried's FTX.Kwon, who had been based in Singapore, disappeared from public view several months later, just as South Korean authorities issued a warrant for his arrest. Officials said he fled to Serbia. He was arrested at an airport in neighboring Montenegro in March 2023 while trying to board a private jet to Dubai using a fake Costa Rican passport.Until Tuesday's guilty plea, Kwon had been consistently defiant in his dealings with authorities. He rejected civil allegations of fraud from the Securities and Exchange Commission. Lawyers for Kwon and his firm, Terraform Labs, battled the SEC during a two-week trial in New York last year, held while Kwon was jailed in the Balkans. But the jury sided with the SEC after less than three hours of deliberations, agreeing that he had defrauded investors in TerraUSD.In Montenegro, Kwon was convicted of using forged documents. Kwon has said that he didn't realize the passport was fake and that he was swindled by the agency in Singapore that got it for him.Kwon fought to avoid extradition to the U.S., expressing a preference to be sent to South Korea, which also sought his extradition, and where outside legal experts said he was likely to get a lighter sentence. Montenegro handed him off to U.S. authorities in late December.Write to Caitlin Ostroff at [email protected] and Alexander Osipovich at [email protected]