Former Terraform Labs developer Will Chen has launched a detailed critique of the fraud case against Do Kwon, calling the prosecution's theory "backwards" in an extensive X thread. This comes just days after a U.S. federal court sentenced Kwon to 15 years in prison on December 15.
Chen, who explicitly stated he is not defending Kwon personally and even wanted him to fail, argues the legal mechanics of the conviction are fundamentally flawed. He described Judge Engelmayer as "sympathetic" and "extremely methodical," but contends that Kwon's guilty plea on December 13 boxed him into accepting the government's framing without debate.
The core of Chen's argument centers on the prosecution's theory regarding Terra's May 2021 depeg event. Prosecutors alleged Kwon fraudulently claimed the algorithmic stablecoin UST could "self-heal" while failing to disclose that market maker Jump Trading secretly intervened to buy UST and restore the peg. Chen rebuts this, stating: "Fraud is when you claim your system has safety mechanisms it doesn't have... But what the government is alleging is the inverse. Do said 'no reserves, the algorithm alone handles it' when he actually did have Jump as a backstop." He concludes, "You don't defraud someone by hiding additional safety mechanisms. The direction is backwards."
Chen further disputes the interpretation of a private remark where Kwon said Terra "might've been fucked without Jump," arguing this reflects uncertainty, not definitive knowledge of a broken mechanism. He also frames the non-disclosure of Jump as a potential strategic move to maintain "strategic ambiguity" against attackers, comparing it to tactics used by central banks.
On the issue of investor losses, Chen strongly objects to the $40 billion fraud loss figure. He argues treating peak-to-trough market capitalization decline as criminal damages sets a "terrible legal precedent for the industry," clarifying that an investor's actual loss is their cost basis, not evaporated paper gains.
While challenging the overarching fraud theory, Chen concedes some Terraform Labs messaging had problems. He states the marketing of Anchor Protocol's unsustainable ~20% yield was "reckless," and that claims about the Chai payment app "probably stretched the truth." However, he maintains the catastrophic losses were driven by the UST depeg and subsequent market crash, not theft as in the FTX or Celsius cases.
Chen warns the legal precedent could criminalize entrepreneurship, where "founder confidence plus project failure equals fraud." He contrasts Kwon's case with Sam Bankman-Fried's, noting SBF stole customer funds that still exist, while Terra's value was destroyed in a market collapse.
At the time of reporting, Terra Luna Classic (LUNC) was trading at $0.00004080.
