SEC Charges Terraform Labs and CEO Do Kwon for "Securities Fraud"

by Arnab Shome
  • The charges blamed them for running a fraudulent scheme.
  • The whereabouts of Do Kwon are currently unknown.
SEC
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The US Securities and Exchange Commission (SEC ) has charged algorithmic stablecoin issuer Terraform Labs and its Chief Executive, Do Kwon, for running a "multi-billion dollar crypto asset securities fraud." Officially announced on Thursday, the securities regulator alleged that the crypto asset offered by the company were unregistered securities.

SEC Charges Terraform Labs and Do Kwon for Fraud

Terraform Labs' algorithmic stablecoin, pegged to 1-to-1 with USD, collapsed last year, sliding almost to zero. It also resulted in a wave of bankruptcies of crypto companies exposed to the project.

The US regulator alleged that Terraform and Kwon orchestrated and ran the fraudulent scheme from April 2018 until the project's collapse in May 2022. According to the lawsuit, the Singapore-based project raised billions of dollars from investors globally by "offering and selling an inter-connected suite of crypto asset securities." Many of these transactions were unregistered.

"Today's action not only holds the defendants accountable for their roles in Terra's collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets, but once again highlights that we look to the economic realities of an offering, not the labels put on it," said Gurbir Grewal, the Director of the SEC's Division of Enforcement.

In addition, the American regulator alleged that Terraform and Kwon claimed to the investors that the value of the company's cryptocurrencies would increase. They even allegedly "misled and deceived" investors by claiming that a popular Korean mobile company is using the Terra blockchain to settle transactions. They are even blamed for misleading investors about the stability of UST, the algorithmic stablecoin.

The complaint added that Terraform and Kwon touted and marketed UST as a "yield-bearing" stablecoin, claiming to return up to 20 percent interest through the Anchor Protocol.

"We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD," said SEC's Chair, Gary Gensler. "We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors."

The lawsuit against Terraform and Kwon filed in federal court for the Southern District of New York in Manhattan charges them with violation of the registration and anti-fraud provisions of the Securities Act and the Exchange Act.

An Unstable Stablecoin

Stablecoins track the price of a fiat currency and other stable assets that keep their value stable, unlike the wild volatility of other cryptocurrencies. However, Terra required the burning of one LUNA to mint one UST. This structure allowed arbitrage opportunities, always allowing traders to swap one LUNA for UST and vice versa at a guaranteed price of $1, regardless of the market value of LUNA. It regulated an unstable market momentum for LUNA that took the so-called "algorithmic stablecoin" down.

For his involvement in the collapse of the stablecoin, Kwon is a wanted man in South Korea with an active arrest warrant against him. His current whereabouts are unknown, but he is recently believed to be in Serbia.

"The Terraform ecosystem was neither decentralized nor financed. It was simply a fraud propped up by a so-called algorithmic 'stablecoin' – the price of which was controlled by the defendants, not any code," Grewal added.

The US Securities and Exchange Commission (SEC ) has charged algorithmic stablecoin issuer Terraform Labs and its Chief Executive, Do Kwon, for running a "multi-billion dollar crypto asset securities fraud." Officially announced on Thursday, the securities regulator alleged that the crypto asset offered by the company were unregistered securities.

SEC Charges Terraform Labs and Do Kwon for Fraud

Terraform Labs' algorithmic stablecoin, pegged to 1-to-1 with USD, collapsed last year, sliding almost to zero. It also resulted in a wave of bankruptcies of crypto companies exposed to the project.

The US regulator alleged that Terraform and Kwon orchestrated and ran the fraudulent scheme from April 2018 until the project's collapse in May 2022. According to the lawsuit, the Singapore-based project raised billions of dollars from investors globally by "offering and selling an inter-connected suite of crypto asset securities." Many of these transactions were unregistered.

"Today's action not only holds the defendants accountable for their roles in Terra's collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets, but once again highlights that we look to the economic realities of an offering, not the labels put on it," said Gurbir Grewal, the Director of the SEC's Division of Enforcement.

In addition, the American regulator alleged that Terraform and Kwon claimed to the investors that the value of the company's cryptocurrencies would increase. They even allegedly "misled and deceived" investors by claiming that a popular Korean mobile company is using the Terra blockchain to settle transactions. They are even blamed for misleading investors about the stability of UST, the algorithmic stablecoin.

The complaint added that Terraform and Kwon touted and marketed UST as a "yield-bearing" stablecoin, claiming to return up to 20 percent interest through the Anchor Protocol.

"We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD," said SEC's Chair, Gary Gensler. "We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors."

The lawsuit against Terraform and Kwon filed in federal court for the Southern District of New York in Manhattan charges them with violation of the registration and anti-fraud provisions of the Securities Act and the Exchange Act.

An Unstable Stablecoin

Stablecoins track the price of a fiat currency and other stable assets that keep their value stable, unlike the wild volatility of other cryptocurrencies. However, Terra required the burning of one LUNA to mint one UST. This structure allowed arbitrage opportunities, always allowing traders to swap one LUNA for UST and vice versa at a guaranteed price of $1, regardless of the market value of LUNA. It regulated an unstable market momentum for LUNA that took the so-called "algorithmic stablecoin" down.

For his involvement in the collapse of the stablecoin, Kwon is a wanted man in South Korea with an active arrest warrant against him. His current whereabouts are unknown, but he is recently believed to be in Serbia.

"The Terraform ecosystem was neither decentralized nor financed. It was simply a fraud propped up by a so-called algorithmic 'stablecoin' – the price of which was controlled by the defendants, not any code," Grewal added.

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