According to the SEC, Terra was nothing more than a multi-billion dollar fraud, and Do Kwon and Terraform Labs must pay.
On February 16, the United States Securities and Exchange Commission (SEC) accused Terraform Labs, the Singapore-based company behind the creation of LUNA and UST – tokens native to the Terra ecosystem – and its co-founder Do Kwon of promoting a multi-million dollar fraud by offering and selling unregistered securities through the use of crypto assets.
The SEC‘s complaint – filed in the United States 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 who used different investment channels.
Trading of unregistered securities
The SEC alleges that the defendants traded unregistered securities of crypto assets for their own gain “by repeatedly asserting that the tokens increased in value.”
Terraform touted its UST stablecoin as a “yield generator,” paying up to 20% interest through the “Anchor” lending and borrowing protocol. According to the agency, they “repeatedly misled investors” by claiming they were working alongside a Korean mobile payment app that used the Terra blockchain to settle transactions that would invalidate the value of LUNA.
The SEC claims that all of these promises were false and only for the personal gain of Terraform and Kwon.
In addition to Luna and UST, Terra offered other investments such as “mAssets” and MIR tokens, which were also labeled as securities by the SEC. mAssets were basically tokenized versions of shares,s and MIR was the native token of Mirror Protocol, a DEX built on the Terra blockchain.
UST was not ‘algorithmic’, says SEC
The defendants used misleading arguments to promote their fraud. SEC Chairman Gary Gensler said the defendants committed fraud by making “false and misleading statements” about the Terra LUNA project to build community trust before causing millions of dollars in losses in some cases.
“We allege that Terraform and Do Kwon failed to provide full, fair, and truthful disclosure to the public as required for a large number of crypto-asset securities, most notably LUNA and Terra USD, […] They committed fraud by repeating false and misleading statements to build confidence before causing devastating losses for investors.”
Gensler commended the SEC’s investigative paper, which demonstrates the lengths a cryptocurrency company can go to pull off a multi-million dollar scam, circumventing securities laws.
Gurbir S. Grewal, Director of the SEC’s Enforcement Division, stressed that the complaint shows that the Terra ecosystem was not decentralized at all, but a “fraud propped up by a so-called algorithmic stablecoin (UST), the price of which “was controlled by the defendants, not by any code.”
The authorities do not want another event like that of Terra
This is not the first time that Do Kwon has been accused of the collapse of Terra LUNA and UST. In July 2022, South Korean authorities allegedly 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 company had been manipulating the price of its LUNA token through laundering operations and other illicit activities.
The investigation was reportedly still ongoing as of September 2022. As of today, Do Kwon is a fugitive allegedly hiding in Serbia, but although there is an Interpol Red Notice on him, he has repeatedly assured that he is not evading the authorities.
The recent collapse of the Terra stablecoin has once again brought attention to the issue of stablecoin regulation. Stablecoins are digital assets designed to hold a stable value relative to a fiat currency or other asset; some back their tokens by holding a proportional amount of the underlying asset, while others use algorithms to balance markets and stabilize price – UST was in this group.
Stablecoins facilitate transactions between fiat and cryptocurrencies on exchanges and provide a stable store of value for users. However, its lack of regulatory oversight has raised concerns among regulators around the world.
