On February 16th, the US Securities and Exchange Commission (SEC) accused Terraform Labs, the Singapore-based company behind the creation of LUNA and UST – native tokens of the Terra ecosystem – and its co-founder Do Kwon of promoting a multi-billion dollar fraud by offering and selling unregistered securities through the use of crypto assets.
The SEC’s complaint – filed in the US District Court for the Southern District of New York – argues that the fraudulent scheme promoted by Kwon and Terraform caused losses of billions of dollars to both retail and institutional investors using different investment channels.
Today we charged Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon with orchestrating a multi-billion-dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.
— U.S. Securities and Exchange Commission (@SECGov) February 16, 2023
The SEC alleges that the defendants marketed unregistered securities of crypto assets to seek their own benefit “by repeatedly claiming that the tokens increased in value.”
Terraform promoted its stablecoin UST as “yield-bearing,” paying up to 20% interest through the lending and borrowing protocol “Anchor.” According to the agency, they “repeatedly misled investors” by claiming that they were working alongside a Korean mobile payment application that used Terra’s blockchain to settle transactions that would invalidate the value of LUNA.
The SEC claims that all these promises were false and only sought Terraform and Kwon’s personal benefit.
Besides Luna and UST, Terra offered other investments like “mAssets” and MIR tokens, which were also labeled as securities by the SEC. mAssets were basically tokenized versions of stock,s and MIR was the native token of Mirror Protocol, a DEX built on top of the Terra blockchain.
The defendants made deceptive arguments to promote their fraud. Gary Gensler, Chairman of the SEC, said that the defendants committed fraud by asserting “false and misleading statements” about the Terra LUNA project to build trust in the community before causing millions of dollars in losses in some cases.
“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, […] They committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
Gensler congratulated the SEC’s investigative work, showing how far a cryptocurrency company can go to carry out a multi-million dollar scam, evading securities laws.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized that the complaint demonstrates that the Terra ecosystem was not at all decentralized but a “fraud propped up by a so-called algorithmic ‘stablecoin’ (UST), whose price “was controlled by the defendants, not any code.”
As reported by CryptoPotato, this is not the first time Do Kwon has been accused of the collapse of Terra LUNA and UST. In July 2022, South Korean authorities reportedly raided Kwon’s offices in Seoul and launched an investigation into TFL, the company behind the Terra stablecoin. The investigation was prompted by allegations that the firm had been manipulating the price of its LUNA token through wash trading and other illicit activities.
According to reports, the investigation was still ongoing as of September 2022. As of today, Do Kwon is a fugitive reportedly hiding in Serbia, but even though there is a red notice from Interpol on him, he has assured several times that he is not evading the authorities.
The recent collapse of the Terra stablecoin has once again drawn attention to the issue of stablecoin regulation. Stablecoins are digital assets designed to maintain a stable value relative to a fiat currency or another asset; some back their tokens by holding a proportional amount of the underlying asset, while others use algorithms to balance the markets and stabilize the price – UST was on this group.
Stablecoins facilitate fiat-to-crypto transactions on exchanges and provide a stable store of value for users. Still, their lack of regulatory oversight has raised concerns among regulators worldwide.
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