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Introduction: The Collapse of the Terra Ecosystem in May 2022 Wiped Out $50 Billion USD in Valuation in Three Days.
The collapse of the Terra ecosystem in May 2022 remains one of the defining ruptures in the history of crypto assets, a failure the mechanics of which revealed deep fragilities in algorithmic stablecoins and whose aftershocks rippled through lenders, hedge funds, exchanges and retail portfolios around the world. For more than two years the story has continued to unfold in civil and criminal courtrooms. Now it has reached a stark new chapter: Kwon Do-Hyung—better known as Do Kwon, the cofounder and public face of Terraform Labs—has pleaded guilty in the United States of America to conspiracy and wire fraud charges. The plea, entered very recently, converts what had long been a loud debate over blame and intent into a matter of criminal record, and it invites a fresh look at what went wrong, how it went wrong, who was hurt, and what the industry and its regulators have—or haven't—learned since, and of the Canadian crypto tax implications of the collapse.
To understand the meaning of this plea, it helps to revisit precisely what Terra was and why it mattered. Terraform Labs, founded by Do Kwon and Daniel Shin, created Terra, a blockchain protocol and payment platform, and launched TerraUSD (UST), an "algorithmic stablecoin," together with a volatile sister token, LUNA. TerraUSD, the third largest stablecoin by market capitalization before its collapse in May 2022, is built atop the Terra protocol and the proof-of-stake codesign of the Terra blockchain.
Unlike other stablecoins at the time, which hold cash and short-term treasury bonds to maintain a one-dollar peg, TerraUSD used code and market incentives: users could always exchange one TerraUSD for one US Dollar's worth of LUNA, and vice versa, with arbitrage supposed to nudge TerraUSD back toward $1 USD whenever it drifted. In practice, that design concentrated risk during stress. If confidence faltered and TerraUSD slipped below $1 USD, arbitrageurs could swap discounted TerraUSD for newly minted LUNA, sell that LUNA on the open market, and profit from the spread. But as more LUNA was minted, its price would fall, requiring ever more LUNA to absorb the same amount of UST, and creating the potential for a reflexive death spiral.
That is exactly what the world saw during the week of May 9, 2022, when TerraUSD lost its peg decisively and LUNA crashed from tens of dollars per token to fractions of a cent per token in days. Exchanges subsequently halted trading, but the damage could not be reversed. The "algorithmic" promise proved unequal to a correlated run, and more than $40 billion USD in market value evaporated within three days.
Part of the Terra story's allure during the bull market was the gravitational pull of Anchor, a lending protocol within the Terra ecosystem that offered eye-popping yields—roughly 19–20% annualized—on TerraUSD deposits. Those returns, marketed as sustainable and "risk-free," attracted billions of dollars in capital and supercharged TerraUSD's growth, but they also masked how dependent the system was on continuous inflows and subsidies from reserves. The Terra collapse did not occur in a vacuum: it helped trigger a chain of failures across the crypto credit complex, exposing leverage at hedge funds and lenders who had leaned on TerraUSD liquidity, and it presaged other high-profile implosions later in 2022.
Civil Trials Led By the US Securities Regulators and Monetary Judgements Against Terraform Labs and Do Kwon
From the moment the peg broke, Terraform Labs and Do Kwon himself faced both civil and criminal scrutiny. US securities regulators accused them of deceiving investors about what sustained the peg and about the fundamental economics of the ecosystem. In April 2024, after a civil trial in New York, a jury found Terraform Labs and Do Kwon liable for securities fraud, a verdict followed by a multi-billion-dollar monetary judgment designed to compensate injured investors and to deter future misconduct.
In parallel, Terraform Labs entered bankruptcy, with a court approving a wind-down that reflected how thoroughly the business had been undone. These civil outcomes did not, by themselves, determine criminal liability. But they laid out a record of evidence and findings that prosecutors later echoed in the criminal case that culminated this week.
The Criminal Case: Do Kwon Pleaded Guilty to Wire Fraud and Conspiracy to Defraud on August 12, 2025
The path to a criminal courtroom was circuitous. Do Kwon left South Korea in 2022, was arrested in Montenegro in March 2023 while travelling on a forged passport, and then became the subject of a tug-of-war over extradition between the United States of America and South Korea, both eager to prosecute.
Do Kwon was ultimately sent to the US, where federal prosecutors in the Southern District of New York pursued a case that centred on misrepresentations to investors and the public about TerraUSD's stability mechanisms. Prosecutors alleged, and Do Kwon has now admitted in court, that claimed "algorithmic" defences of the peg were buttressed by undisclosed arrangements with a trading firm to intervene and prop up the price when it wobbled—a fact pattern that recasts supposedly automatic market discipline as surreptitious, manual defence.
The plea entered in August 2025 includes one count of conspiracy to commit commodities, securities, and wire fraud, and one separate count of wire fraud. As part of the plea agreement, Do Kwon consented to forfeit more than $19 million USD in proceeds and interests tied to Terraform Labs and its digital assets, and prosecutors indicated they would recommend a custodial sentence capped at around a dozen years, subject to the judge's ultimate decision, which is scheduled for December 11, 2025.
The guilty plea also forces a reckoning with the role of disclosure in markets that prize permissionless innovation. The government's narrative—now essentially adopted by Do Kwon—asserts that the market was not given full and fair information about how the peg was defended. Investors were told the algorithm would work; they were not told that a trading firm had been enlisted to conduct secret interventions at moments of stress.
To the extent Anchor's yields were presented as sustainably generated by lending activity, without a forthright accounting of subsidies and runway, depositors were similarly given a skewed picture. In boom times, such caveats can look academic. In a run, they are the difference between understanding risk and being blindsided.
Regulators' civil and criminal theories in the Terraform saga rest on this simple principle, which potentially applies to any cryptocurrency: if you sell something as stable and programmatically defended, but in truth you are depending on opaque, discretionary props, you are misrepresenting material facts.
That legal principle is not unique to crypto; nevertheless, it is the same principle that animates rules for money market funds, bank balance-sheet disclosures, and consumer lending. The Terra case, by casting it in code's clothing, made it newly vivid for a different audience.
What Happens Next for Do Kwon and Terraform Labs
Some observers will ask whether this plea marks the end of the Terra saga. Legally, it does not. Do Kwon still faces proceedings in South Korea related to alleged violations of capital-markets laws there, and any sentence imposed in New York will be followed by decisions about potential transfers or additional prosecutions abroad.
Financially, the bankruptcy process for Terraform Labs continues to sort through claims, clawbacks, and distributions, bounded by the reality that even multi-billion-dollar judgments cannot resurrect value that was vaporized in a market crash. Civil regulators have already announced figures that, on paper, look massive. In reality, what victims ultimately receive will depend on asset recovery and estate resources, not headline numbers. Those processes are slow, legalistic, and often unsatisfying for retail investors who lived through a week in which screens showed balances one day and near-zero the next.
What Happens Next for Crypto Investors Who Suffered Loss During the Terra Collapse
With more than $40 billion USD in market value evaporated within three days as a result of the Terra collapse, many crypto investors have suffered significant losses as their TerraUSD portfolio effectively lost its entire value. For crypto investors in Canada who incurred crypto losses during the Terra collapse, they may be able to claim the loss on their Canadian income-tax returns as a capital loss or business loss, depending on whether their cryptocurrency transactions constitute an adventure or concern in the nature of trade or whether they were a trader of cryptocurrency.
The characterization is to be determined based on specific facts relevant to the investors' case. Capital and business losses can also be carried forward or backward to reduce income tax liabilities for other tax years as part of a tax planning strategy.
Canadian crypto investors may also incur significant crypto losses for other reasons. Cryptocurrency scams, such as "pig-butchering" scams, have become quite common within Canada and anywhere else in the world. A crypto investor's cold wallets may be stolen during a home robbery or lost during a move to a new residence. Losing passcodes to access a wallet is also another classic example of how crypto investors can incur crypto losses.
Regardless of the reasons why the crypto assets are lost or how the Canadian crypto investors' crypto assets lose their value, the investors likely can claim the loss to deduct from their Canadian income.
The Broader Impact on the Crypto Market
For the broader crypto market, the Terra collapse has had two contradictory effects. On one hand, it degraded trust, both among retail participants and in institutional boardrooms where risk officers pointed to TerraUSD as a case study in what not to touch.
On the other hand, it galvanized a wave of design changes and policy debates. Stablecoin issuers pegged to cash and treasuries emphasized transparency, attestation and reserves; decentralized finance architects revisited assumptions about reflexivity and collateralization; and lawmakers in multiple jurisdictions sharpened proposals to bring stablecoin issuance under bank-like or payments-institution regimes.
Even critics who would prefer to see crypto finance wither must concede that the Terra collapse accelerated clarity about what minimum guardrails are necessary for anything labelled "stable" to function at scale. The subsequent period saw more conservative stablecoins consolidate market share, while purely algorithmic designs receded from the mainstream. That shift was a market verdict delivered after a public experiment went wrong in full view.
Lessons for Policymakers Around the World: What Have They Learned About Stablecoins?
The Terra collapse undoubtedly alerted policymakers around the world to pay attention to regulating the crypto market. What, then, should policymakers around the world take forward from this denouement? First, stable means collateralized—or at least, if stability is sought without matched reserves, the disclosure must be relentless, conservative and specific about failure modes. If a system's defence relies on minting more of a volatile token when stress hits, that mechanism must be framed as experimental and risky, not marketed as a cash equivalent.
Second, governance needs to be legible. With respect to discretionary defence, markets need to know who decides, under what rules, and with what transparency. Omission of information related to the foundation of crypto assets, as shown in the Terra collapse, can be detrimental.
Third, incentives matter even more in decentralized systems than centralized ones. If Anchor-like protocols pay out double-digit yields, participants should assume those yields are subsidies that can end abruptly, rather than steady income streams.
Fourth, and perhaps most painfully, the crypto market has to accept that reputational blowups incur policy responses: after Terra, regulators obtained courtroom victories, extracted settlements, and felt emboldened to press for hard-edged statutory frameworks. The guilty plea will strengthen that hand further, providing a criminal benchmark that will be cited in legislative hearings and regulatory rulemakings for years to come.
Accountability and the Future of Financial Innovation: Criminalizing the Act of Lying But Not the Stablecoin
In the end, the most important takeaway from the Terra collapse is accountability. For months after the collapse, debate raged about whether Terra was an honest failure of an ambitious design or something closer to a con. In truth, complex systems can fail honestly and be sold dishonestly at the same time. Terra has not been the only example. The collapse of cryptocurrency exchanges, such as FTX and QuadrigaCX, also shared a similar story.
The math of the mint-burn mechanism did not need to be fraudulent to be fatally fragile; the promotional framing did not need to be false in every particular to be misleading in the aggregate. The US criminal case—now resolved by a plea—did not seek to criminalize the idea of an algorithmic stablecoin. It sought to criminalize the act of lying about how that stablecoin was defended and maintained.
The line matters. It signals to founders that experimentation remains lawful, but only within the ancient boundaries that prohibit deceit. It signals to investors that due diligence is not optional just because a white paper is well written. And it signals to the industry that the era of charming personalities talking markets into suspension of disbelief is giving way to an era in which words are weighed in court.
As sentencing approaches in December 2025, that is the sober context in which Do Kwon's admissions will be read: not as the end of the Terra story, but as an anchor point in a longer narrative about financial innovation, truth, and the price of getting both wrong.
Pro Tips – You May Be Able to Claim Crypto Losses to Deduct Your Income Taxes
Crypto investors may incur significant crypto losses for various reasons: The Terra collapse, for example, resulted in the loss of investors' entire TerraUSD portfolio; People may also be caught up in cryptocurrency scams; Cold wallets may be stolen during a home robbery or lost during a move; Passcodes to access a wallet may be forgotten. The loss of cryptocurrency investment, however, can potentially be considered a business or capital loss, which can deduct an investor's income in that year.
If you have recently been involved in a cryptocurrency scam (such as a pig-butchering scheme), received significant loss from your cryptocurrency investment, or have concerns regarding your cryptocurrency investment, you should engage with one of our expert Canadian crypto tax lawyers. Our seasoned Canadian tax lawyers can help review your crypto and crypto-related tax matters and provide corresponding tax advice specific to your case.
FAQ
What Happened During the Terra Collapse?
In May 2022, Terraform Labs' algorithmic stablecoin TerraUSD (UST) lost its $1 peg, triggering a "death spiral" in which its sister token LUNA collapsed to near zero in value within a very short amount of time. Market value of TerraUSD, exceeding $40 billion USD, vanished, affecting retail investors, hedge funds, and crypto lenders worldwide. The Terra collapse reshaped the crypto landscape. Policymakers worldwide advanced stricter rules for stablecoin issuers.
Regulators accused Terraform Labs and cofounder Kwon Do-Hyung of deceiving the public. In April 2024, a US jury found them liable for securities fraud in a civil case, resulting in multi-billion-dollar judgments. Terraform Labs subsequently entered bankruptcy. Then, in August 2025, Do Kwon pleaded guilty to conspiracy and wire fraud, admitting to misleading investors about Terra's stability mechanisms. The plea includes forfeiture of over $19 million and a recommended prison term of about 12 years, pending sentencing in December 2025. Do Kwon is also likely facing prosecution in South Korea.
What Can I Do After I Lost A Significant Amount of Crypto?
Losses from cryptocurrency can be characterized as capital losses or business losses, depending on the intended purposes for the crypto assets that you have purchased. The characterization is to be determined based on specific facts relevant to your case. If you have lost a significant amount of crypto assets as a result of scam or theft, you should consider claiming the loss on your Canadian income-tax return to reduce your overall tax liability for the year the loss incurred in.
Capital and business losses can also be carried forward or backward to reduce income tax liabilities for other tax years. We recommend that if you wish to deduct crypto losses from your Canadian tax returns, you should consult with one of our expert Canadian crypto tax lawyers, to better understand how you should characterize the loss, the amount of loss that you could claim, and potential risks of CRA tax audits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
