Prepare for the Kwon Terra test in 2026: Here’s what you need to know

Terraform Labs co-founder Do Kwon's high-profile trial is scheduled for January 26, 2026 in the U.S. District Court for the Southern District of New York. He will spend the next year in federal prison after his lawyers agreed to a plea deal.

The trial, which is expected to last four to eight weeks, will address criminal fraud charges related to the $40 billion collapse of the TerraUSD (UST) stablecoin in 2022 and its sister token Tocus.

The case is the culmination of a series of international legal battles, money laundering and fraud allegations that have dashed the hopes that once lured millions of crypto investors.

Do Kwon, who pleaded not guilty to the charges last week, has been charged with several counts of fraud, including securities fraud, wire fraud and money laundering.

Prosecutors allege in the indictment that Terra's founder orchestrated a scheme to manipulate markets, misrepresent the stability of Terraform products, and siphon funds from Swiss bank accounts and other blockchains.

The 33-year-old faces up to 130 years in prison if convicted.

In addition to the criminal charges, Kuo faces several civil charges. In April 2024, a New York jury found Kwon guilty of fraud in a case filed by the SEC.

Terraform Labs agreed to a $4.47 billion settlement with the SEC in June 2024. The Commodity Futures Trading Commission (CFTC) also filed charges against Kwon, exacerbating his legal challenges.

Speaking to Decrypt, Syd Powell, CEO and founder of Maple Finance, called the collapse of the Terra ecosystem a “wake-up call” for DeFi, or decentralized finance—a catch-all term that describes a variety of protocols and platforms that have been developed automatically. , crypto-driven financial products.

“Legislators are starting to take a more aggressive approach to DeFi protocols when it comes to regulatory implications,” Powell said. “Developers have responded by prioritizing resilience and risk management, incorporating over-reliance models, and seeking hybrid approaches that combine algorithmic design with assurance.”

How 40 billion dollars disappeared in days

The collapse of the Terraform Labs ecosystem in May 2022 remains one of the most devastating events in crypto history. It wiped out $40 billion in market value almost overnight.

Both UST and LUNA were designed to work together in a system that would provide stability and high returns, but flaws in the design led to catastrophic failure. UST stability is based on an algorithmic system and its value is maintained with LUNA through burn-in and minting.

When UST trades below $1, users can burn UST with LUNA, reducing supply and restoring the peg. Conversely, when UST trades above $1, LUNA can be burned to generate more UST.

In the year On May 6, 2022, a large UST selloff on Curve Finance caused the stablecoin to miss the dollar peg. Panic sets in, leading to mass redemption.

As the price of UST dropped, the burn and mint method greatly inflated the supply of LUNA, depleting its value. Within days, UST fell to $0.13, while LUNA's price fell by hundreds of fractions from $64.

The algorithm failed to stabilize the UST, triggering a death spiral that destroyed the ecosystem and affected an estimated one million victims.

The collapse also rippled through the crypto sector, pushing several related projects into bankruptcy and ultimately contributing to the collapse of the FTX exchange.

There has also been more skepticism about high-yield crypto projects (since the crash), leading to a focus on more sustainable projects, Sey Labs founder Jayandra “Jay” Jog told Decrypt. “Algorithmically stable stablecoins – seen as innovative but inherently risky – have declined, prompting investors to focus on fiat-backed stablecoins such as USDC and USDT.”

False traction

Following the collapse of TerraUSD, Kwon went on the run, evading international authorities. Kwon was arrested in Montenegro in March 2023 for trying to travel on a fake passport.

Both the US and South Korea have requested their extradition. Montenegrin courts initially ruled in South Korea's favor, but US prosecutors eventually confirmed extradition in December 2024.

Upon his arrival in the U.S., Khun appeared in court and agreed to remain in jail without bail.

The Terra crash exposed the vulnerabilities of algorithmic stablecoins and unregulated financial systems. Kwon now faces a trial, which serves as a litmus test for accountability in the largely unregulated crypto space.

Edited by Stacy Elliott.