According to a court complaint made by the SEC, crypto developer Do Kwon and his business Terraform Labs have been accused with defrauding investors in a multibillion-dollar conspiracy.
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
According to the SEC’s lawsuit, Terraform and Do Kwon deceived investors about several matters, including who was utilizing TerraUSD for payments, and by labeling the yield-bearing Anchor Protocol and the LUNA token crypto asset securities. The SEC has filed many charges against Terraform and Kwon, including fraud, unregistered securities sales, and unregistered security-based swaps sales.
Terraform and Kwon also misled investors about one of the most important aspects of Terraform’s offering the stability of UST, the algorithmic ‘stablecoin’ purportedly pegged to the U.S. dollar. UST’s price falling below its $1.00 ‘peg’ and not quickly being restored by the algorithm would spell doom for the entire Terraform ecosystem, given that UST and LUNA had no reserve of assets or any other backing.
The Complaint said
The lawsuit claimed that Kwon and Terraform coordinated with an unnamed U.S. trading entity to recover the UST’s lost 10 cents in value during the month of May 2021. In exchange for its purchases of the UST token, the trading business got LUNA tokens from Terraform.
This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws, but it also demonstrates the strength and commitment of the SEC’s dedicated public servants.
Said SEC Chair Gary Gensler in a statement
UST, like many other stablecoins, was initially set at a 1:1 exchange rate with the dollar. To “burn,” or destroy, one luna was necessary to mint one new UST. Users may always exchange one luna for UST and vice versa at a fixed price of $1 regardless of the market price of either token at the moment, making arbitrage possibilities possible and crucial to maintaining the peg. Nonetheless, the instability of the luna price eventually led UST to abandon its $1 peg, an action that drove both terra and luna into a free fall.
Both Do Kwon and Terraform are accused of breaking the Securities and Exchange Acts’ anti-fraud and registration rules in a lawsuit filed in Manhattan’s federal court for the Southern District of New York.
