NEW YORK, March 25 (Reuters) -

Terraform Labs and its founder Do Kwon built a "house of

cards" and lied to investors about the stability of a

cryptocurrency whose collapse rippled through markets in 2022, a

lawyer for the U.S. Securities and Exchange Commission told a

Manhattan jury as its civil fraud trial began on Monday.

The SEC accused Kwon and the Singapore-based blockchain

company of misleading investors in 2021 about the stability of

TerraUSD, a stablecoin designed to maintain a value of $1. The

regulator also accused them of falsely claiming Terraform's

blockchain was used in a popular Korean mobile payment app.

"Terra was a fraud, a house of cards, and when it collapsed,

investors lost nearly everything," SEC attorney Devon Staren

said at trial.

Louis Pellegrino, an attorney for Terraform, said the

regulator's case relies on cherry-picked evidence and the

testimony of witnesses hoping for whistleblower payouts if the

SEC wins.

Kwon's attorney David Patton said the crypto entrepreneur

never represented Terra's cryptocurrency as risk-free.

"Failure doesn't equal fraud," Patton said.

Kwon will not attend the trial, which is expected to last

around two weeks. He was arrested in Montenegro in March 2023

and is awaiting extradition to his native South Korea, where he

faces criminal charges. A Montenegro court on Friday delayed his

extradition after the prosecutor's office there voiced concerns

about the process.

Federal prosecutors in New York have also charged Kwon with

fraud and are seeking his extradition to the United States.

Kwon designed TerraUSD and Luna, a more traditional token

that fluctuated in value but was closely linked to TerraUSD.

The SEC estimates that investors lost more than $40 billion

on the two tokens combined when the TerraUSD peg to the dollar

could not be maintained in May 2022.

Their collapse also dragged down the value of other

cryptocurrencies, including bitcoin, and caused wider havoc in

the crypto market, leading several companies to file for

bankruptcy in 2022.

The SEC has said Kwon and Terraform secretly arranged to

have a third party purchase large amounts of TerraUSD to prop up

the price when the stablecoin slipped from its peg a year

earlier, in May 2021. Kwon falsely attributed the recovery to

the reliability of TerraUSD's algorithms, according to the

regulator.

The SEC also has said Kwon and Terraform falsely touted

Terraform's blockchain as being used to process and settle

transactions between customers and merchants on the Chai payment

app.

The SEC is seeking civil financial penalties and orders

barring Kwon and Terraform from the securities industry.

U.S. District Judge Jed Rakoff granted the SEC a partial win

in December, ruling that Terraform Labs unlawfully sold digital

assets without registering them as securities.

The judge dismissed the SEC's allegations that Terraform and

Kwon illegally offered security-based swaps through a feature

that let users create digital assets that mirrored the price of

another asset, such as a different cryptocurrency or stock.

The judge has not yet determined the amount of damages that

Terraform must pay. The company, which filed for bankruptcy

protection in January, has said a penalty could exceed its

assets.