money SEC charges Do Kwon, Terraform Labs with securities fraud
The Securities and Exchange Commission (SEC) has charged Terraform Labs and its founder and CEO, Do Kwon, with defrauding investors.
At the beginning of May 2022, the $60 billion Terra blockchain ecosystem collapsed over a matter of days after its algorithmic stablecoin, Terra USD, lost its crucial $1 price peg and experienced a bank run.
"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 Chair Gary Gensler.
As the complaint alleges, from April 2018 to May 2022, Terraform and Kwon raised billions of dollars from investors by offering an "inter-connected suite crypto asset securities, many in unregistered transactions."
Those assets included security-based swaps designed to mirror the price of stock of U.S. companies and Terra USD the algorithmic stablecoin and the Terra ecosystem's native cryptocurrency, LUNA.
Gensler said the agency also alleges both Terraform and Do Kwon committed fraud by repeating false and misleading statements to build trust before the Terra blockchain ecosystem's collapse.
According to the complaint, Terraform and Kwon repeatedly told investors Korean mobile payment application Chai used the Terra blockchain to process commercial payments between merchants and customers. However, this seeming breakthrough use case for Terra, turned out not to be a real thing, the agency alleged.
“Rather, Defendants deceptively replicated Chai payments onto the Terraform blockchain, in order to make it appear that they were occurring on the Terraform blockchain, when, in fact, Chai payments were made through traditional means,” the complaint stated.
The complaint also states Kwon and team misled the public on the status of Terra's governance model.
A year before its demise in May 2021, the price of Terra USD fell below its peg. Kwon and team sought help from a third-party buyer who restored the peg by purchasing massive amounts of the stablecoin. Once restored, the team behind TerraUSD “publicly and repeatedly touted the restoration of the $1.00 UST peg as a triumph of decentralization."
Kwon, who was previously served a subpoena by the SEC in Sept. 2021 just before joining a speaking panel at a crypto industry conference, sued the agency the next month in the Southern District of New York.
Kwon, who is known to this day for outrageous Twitter comments —‚such as telling off a critic "have fun staying poor" and assuring investors shortly before Terra's collapse that his team was "deploying more capital - steady lads" — is one of crypto's most notorious public figures from the recent bull run.
Unlike other stablecoins that use cash to keep a steady $1 price peg, Terra USD used an algorithm linked to the supply of sister token, LUNA.
As the stablecoin spiraled below its price peg, the Terra ecosystem fell with it, wiling out $60 billion in investor funds. The implosion hastened the default of crypto hedge fund Three Arrows Capital in June, spreading financial contagion between high risk centralized lending and borrowing crypto firms.
Five other crypto firms — Celsius, Voyager, FTX, BlockFi and Genesis — have since filed for bankruptcy.
An arrest warrant has been issued for Do Kwon in his native country South Korea. According to South Korean police reports, Kwon’s last known location was Serbia.
"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 shoc 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 Gubir Grewal, the director of the SEC’s division of enforcement.
"As alleged in our complaint, the Terra ecosystem was neither decentralized, nor finance. It was simply fraud propped up by a so-called algorithmic 'stablecoin' — the price of which was controlled by the defendants, not the code."
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