In May 2022, the Terra Luna network collapsed, wiping out approximately $60 billion of value — $40 billion in Luna and $18 billion in UST — leaving a wake of destruction to both institutional and individual investors alike. Three Arrows Capital (3AC), considered one of the most sophisticated crypto hedge funds, suffered such catastrophic losses due to Terra Luna’s collapse that, in just a few weeks, the fund went from managing $10 billion of assets to bankruptcy causing a chain reaction of bankruptcies — Voyager Digital, Celsius Network, Genesis Asia Pacific, BlockFi, Alameda Research, and finally, FTX. In total, investors lost more than $2 trillion.

Many sophisticated investors, captivated by the vision of a decentralized financial future, were drawn to the Terra Luna network, a blockchain platform hailed as a pioneer of crypto innovation. Its flagship stablecoin, TerraUSD (UST), claimed to maintain a decentralized 1:1 peg to the U.S. dollar, while the Anchor Protocol offered an enticing high-yield savings product. Together, they appeared to be rare safe havens in an otherwise volatile market, making them irresistible to those seeking stable income.

Eventually, the illusion shattered. Terra Luna’s catastrophic collapse vaporized nearly $60 billion in value, crushing investors who had trusted its promises. What was marketed as safe and reliable turned out to be a house of cards, allegedly propped up by algorithmic manipulations and misrepresentations about user adoption.

Amid the wreckage, criminal prosecution against investors like Nevin Shetty brings into question the government’s approach to justice. As CFO with sole discretionary investment authority, Shetty allocated corporate funds to Terra Luna through HighTower Treasury, an entity in which he held an ownership stake. Lured by promises of stable income, Shetty fell victim to the same promises that seduced billion-dollar hedge funds and crypto-savvy institutional investors. His decision mirrored the industry consensus at the time, which was that Terra Luna and Anchor Protocol offered stability in an otherwise unpredictable crypto market.

While Do Kwon and Terraform Labs face allegations of systemic fraud, Shetty’s case rests on a far narrower claim that his company would have objected to cryptocurrency exposure. It is an assertion many legal experts argue might justify civil liability, but hardly meets the threshold for criminal fraud under federal statutes.

Given the staggering scale of the Terra Luna fraud, the government’s decision to prosecute Shetty with criminal fraud invites scrutiny. It calls into question whether regulators are succumbing to hindsight bias while disproportionately targeting small players in a catastrophe allegedly orchestrated by others. This selective enforcement punishes those caught in the undertow rather than those who created the storm.

Terra Luna’s Allure: Safe and Stable Money

At the core of Terra Luna’s appeal was its stablecoin, TerraUSD (UST), which purported to solve one of cryptocurrency’s most persistent challenges: volatility. UST was a stablecoin, pegged to the value of the U.S. dollar. Unlike fiat-backed stablecoins such as Tether (USDT) and Circle (USDC), UST promised dollar parity through a purely algorithmic balancing mechanism. While it experienced several temporary depegging events, these were marketed as stress tests demonstrating the system’s self-correcting capabilities and validated its innovative mathematical model.

What made UST revolutionary was its decentralization, a direct continuation of Bitcoin creator Satoshi Nakamoto’s vision. This stood in stark contrast to centralized stablecoins like USDT and USDC, whose centralized corporate governance models represented exactly what crypto purists sought to disrupt. The recent Nasdaq IPO of USDC issuer Circle Financial only underscores this distinction, as Circle Financial and USDC are now under the purview of U.S. regulators. At the time, and in just three years, UST’s rapid ascent from concept to $18 billion market cap appeared to validate both its technical merits as an algorithmic stablecoin and its credibility as a genuine decentralized financial instrument.

Supporting the UST ecosystem was Anchor Protocol, a savings and lending platform that advertised an annual yield of approximately 19% for depositors. Anchor claimed the interest rates were sustainable as they were backed by interest paid by borrowers and returns generated from blockchain staking rewards. Anchor proclaimed itself as the crypto version of a high-yield savings account: secure, efficient, and with none of the risks associated with speculative investments. The Anchor Protocol white paper, issued by architects of Terra Luna, states, “Anchor Offers a principal-protected stablecoin savings product that accepts Terra deposits and pays a stable interest rate.”

For many investors, the combination of stability and high interest rates were justified. It wasn’t a speculative bet; it was a rationale investment decision made on Terra’s reputation, market size, and apparent legitimacy.

A System Built on Alleged Misrepresentation

The Terra Luna Network, founded by the charismatic Do Kwon, was marketed as a cutting-edge ecosystem. At its peak, Terra boasted over $58 billion in market capitalization, and UST became the third-largest stablecoin globally, reaching $18 billion in value. The scale of the ecosystem, comprising many consumer-facing applications, gave investors a sense of legitimacy and trust.

To bolster confidence further, Terra Luna announced major partnerships. In 2018, it claimed to partner with 15 Asian e-commerce giants with a combined $25 billion transaction volume. In February of 2022, the Washington Nationals baseball team publicly announced a five-year, $40 million sponsorship with Terra, accepting UST as a payment option at its ballpark. These endorsements lent credibility, positioning Terra Luna not as a niche experiment but as a legitimate alternative to traditional finance.

But, as the Securities and Exchange Commission and Department of Justice would later allege, much of this confidence was built on misrepresentation and manipulation. The DOJ claims Kwon conspired with others to defraud and deceive individuals about aspects of the Terra blockchain, including its technology and the extent to which it had been adopted by users. Additionally, the DOJ alleges Kwon deceived the public about the effectiveness of the UST algorithmic mechanism through market manipulation.

The Lure of Stability Amid Chaos

To understand Terra Luna’s appeal, one must examine the crypto landscape of 2021. Decentralized finance (DeFi) had ballooned to over $200 billion in total value locked (TVL), attracting both institutional and retail investors eager to reinvent traditional finance, but desperate for stability amid crypto’s notorious volatility.

Terra Luna seemed to offer the perfect solution. Unlike speculative assets, its algorithmic stablecoin UST promised price stability, while Anchor Protocol marketed itself as a safe platform to earn passive income with consistently high yields. Investors believed Do Kwon because of the scale: billions in deposits, major corporate partnerships, and widespread adoption. Do Kwon championed this vision, casting himself as the architect bridging Wall Street and blockchain, a narrative that proved irresistible to believers.

How Terra Luna Collapsed

The Terra ecosystem relied entirely on UST maintaining its peg. UST achieved price stability through an algorithm relationship with token counterpart Luna, making it the first decentralized stablecoin to reach massive scale. The system worked through a theoretically elegant equilibrium: when UST dipped below $1, the protocol would burn UST and mint Luna to restore parity; when UST rose above $1, it would mint UST while burning Luna.

This delicate balance collapsed in May 2022 when initial downward price pressure triggered panic selling. The algorithm’s programmed response to create more Luna to absorb the selloff in UST did not bring UST back to dollar parity but instead created a vicious death spiral. Within just a few days, both tokens were essentially worthless, erasing what had been a thriving $60 billion ecosystem. Anchor Protocol, which relied on UST’s stability, crumbled alongside it. Investors who believed their funds were safe watched as their savings vanished. The collapse triggered a broader crypto market meltdown, erasing $2 trillion in value globally.

For both institutional and everyday retail investors, the fallout was devastating. Everything about Terra Luna appeared legitimate — until it wasn’t.

The Fallout and Do Kwon’s Reckoning

In the aftermath, regulators began to scrutinize the collapse. In February 2023, the SEC charged Do Kwon and Terraform Labs with defrauding investors, citing false advertising, misrepresentation of UST’s stability, and misleading claims about adoption.

The DOJ followed with criminal fraud charges, further escalating Kwon’s legal troubles. While Kwon denied wrongdoing, he fled authorities leading to an international manhunt. In 2023, he was detained in Montenegro for using falsified travel documents, with both the U.S. and South Korea seeking his extradition. In January 2024, the Montenegro granted the U.S. request and extradited Do Kwon to New York where he has plead not guilty and is awaiting trial.

The Perils of Trust and Hindsight Bias

In the wake of Terra’s collapse, critics were quick to judge those who had invested. But hindsight bias, believing the collapse was predictable, is a distortion. At the time, Terra Luna had every hallmark of a prudent investment: partnerships with legitimate companies, billions in market capitalization, and a stablecoin model that appeared robust.

Many sophisticated investors did not believe that investing in the Terra Luna network was speculation; rather, it was a sound investment based on available information. Investors trusted that the system was as safe as it claimed to be. Instead, they became victims of manipulation and false confidence.

A Cautionary Tale for Investors

The collapse of Terra Luna and Anchor Protocol transcends cryptocurrency. It is a timeless case study in the perils of investment euphoria. This event reveals how even experienced investors, equipped with thorough analysis and operating in good faith, can fall victim to systemic risks that only become apparent in hindsight.

Markets reward innovation, but history shows that all novel systems, from complex derivatives to algorithmic stablecoins, demand rigorous skepticism. Paradoxically, the most perilous investments often masquerade as secure. In this context, prosecuting individuals like Nevin Shetty for investments that reflected mainstream market consensus seems not only misguided but fundamentally unjust, replacing thoughtful justice with the cruelty of hindsight.

The true failure lies not in investors’ inability to foresee the unforeseeable, but in a system that repeatedly enables such catastrophic risk mispricing to occur. While personal responsibility matters, accountability should focus first on those who designed and promoted these flawed systems, not those who reasonably, if mistakenly, trusted them. Ultimately, the enduring lesson for all investors remains unchanged: for investors seduced by financial alchemy, disciplined skepticism remains the ultimate defense.