Former Terraform Labs developer Will Chen has fired a legal critique at the fraud case that led to Do Kwon’s conviction, arguing the government’s theory about Terra’s collapse runs “backwards” and risks setting damaging precedents for the industry.
Chen posted his thread on X on Dec. 13 — two days before a court sentenced Kwon to 15 years in prison on Dec. 15 — framing his comments as a technical legal objection rather than a defense of Kwon’s character. “I wanted Do to fail. I wanted him punished,” Chen wrote, adding that he had confronted Kwon directly in the past. “I’m not here to defend Do Kwon the person. But the legal case is broken.”
What the prosecutors argued
At the heart of the government’s case is its explanation of Terra’s May 2021 depeg. Prosecutors say Kwon publicly described Terra’s algorithmic mechanics as self-healing and failed to disclose that Jump Trading had stepped in to buy UST and shore up the peg. That omission, the government contends, rendered Kwon’s public statements deceptive and therefore fraudulent.
Chen’s counterargument: the logic is reversed
Chen says that definition of fraud doesn’t fit the facts. “Fraud is when you claim your system has safety mechanisms it doesn’t have, and people invest trusting that fake safety,” he wrote. But, Chen argued, the government’s allegation describes the inverse: Kwon claimed the algorithm alone handled the peg when, in reality, a backstop (Jump) existed. In his view, Kwon was effectively claiming less safety than was actually present — not more. “You don’t defraud someone by hiding additional safety mechanisms. The direction is backwards,” he said.
On a private remark attributed to Kwon — that Terra “might’ve been fucked without Jump” — Chen drew a sharp linguistic distinction. “Might’ve been fucked” expresses uncertainty about a counterfactual, he wrote; it is not the same as “knew it would have failed,” which implies definite knowledge. Chen argued you’d only know the algorithm would fail if you deliberately did nothing and let it die — an approach that is incompatible with operating a live financial system.
Non-disclosure as strategy, not deception
Chen also suggested non-disclosure of backstops can be a deliberate defensive strategy. Algorithmic stablecoins operate in adversarial environments, he wrote: revealing exact reserve sizes or defense mechanisms can help attackers calculate precisely how to overwhelm a protocol. That “strategic ambiguity,” he says, is used by institutions such as central banks and could make a project more secure, not less.
Causation and the noisy information environment
Chen challenged whether prosecutors proved that Kwon’s statements directly influenced investor behavior. He pointed to years of public debate, Terra’s open-source code, a white paper that outlined failure modes, and prominent critics — all evidence of a noisy, information-rich market. He also argued that the information landscape changed significantly by May 2022, after the Luna Foundation Guard’s public launch in January 2022 and visible on-chain reserves. In his view, the May 2021 non-disclosure about Jump is causally disconnected from the catastrophic losses that unfolded a year later.
Disputing the $40 billion loss figure
One of Chen’s most forceful objections is legal attribution of $40 billion in losses to Kwon. He said the market-cap peak-to-trough number is not equivalent to “fraud loss.” Using a simple example, he noted that if someone bought LUNA at $1, watched it rise to $100, and then fall back to zero, their actual loss is $1 — not the unrealized $99 gain that vanished. Treating market-cap evaporation as damages, Chen warned, could set a troubling legal precedent for crypto.
Where Chen concedes wrongdoing
Chen did not absolve Terraform Labs entirely. He said allegations around Chai (a payments app linked to Terra) have more merit as fraud claims than prosecutors acknowledged: Chai did use Terra for accounting, had wallet integration, and allowed top-ups with KRT, even if Kwon “probably stretched the truth” about settlement mechanics. He called the Anchor yield marketing — the roughly 20% advertised rate — harder to defend: promoting an unsustainable yield while reserves depleted was “reckless,” and Kwon likely knew the 20% couldn’t last without a concrete plan. Still, Chen argued, if UST had held its peg, investors would have earned lower interest rather than losing principal.
SBF comparison and the repayment question
Chen contrasted Terra’s collapse with the FTX case. “SBF literally stole customer deposits and used them for other purposes,” he wrote, which is why FTX victims are seeing asset recoveries: the money still exists somewhere. By contrast, Terra’s value was destroyed in a market crash, not reallocated to other accounts — meaning victims’ losses aren’t recoverable in the same way. Treating these events as equivalent, Chen argued, is a mistake.
A warning about criminalizing entrepreneurship
Closing his thread, Chen warned that convicting founders for public optimism that later proves wrong risks criminalizing entrepreneurship. “If founder confidence plus project failure equals fraud, we’ve criminalized entrepreneurship,” he wrote. He also argued that Kwon’s guilty plea effectively locked him into the government’s narrative and prevented the sort of contested defense that might have constrained the legal theory or limited the scope of damages.
Market note
At press time, LUNC traded at $0.00004080.
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