SEC Charges Terraform Labs and CEO Do Kwon for Alleged Stablecoin Fraud
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
The United States Securities and Exchange Commission (SEC) has filed a lawsuit against stablecoin operator Terraform Labs and its founder, Do Kwon, for allegedly promoting a multi-million dollar fraud using crypto assets.
Lawsuit Against Terraform
Terraform Labs, the Singapore-based company behind the creation of the Terra ecosystem’s LUNA and TerraUSD (UST) crypto assets, and its CEO, Do Kwon, were charged, on Thursday, by the Securities and Exchange Commission for alleged crypto fraud.
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, the crypto company and its CEO promoted a multibillion-dollar fraud by offering and selling unregistered securities through crypto assets. The lawsuit, filed in the United States District Court for the Southern District of New York, emphasizes that the fraudulent scheme promoted by Terraform and Kwon and disguised by crypto assets have caused colossal losses of billions of dollars to retail and institutional investors.
Marketing of Unregistered Securities
The SEC alleges that Terraform’s operation started in April 2018 before it collapsed in May 2022. During this timeframe, Kwon and Terraform raised billions of dollars in investment by offering and selling an inter-connected suite of diverse crypto assets, securities, and many unregistered transactions.
These crypto assets included “mAssets,” a security-based token that mirrors the price of U.S. stock companies, and TerraUSD (UST), an algorithmic stablecoin pegged to the U.S. dollar.
Terraform promoted TerraUSD as a yield-bearing asset that pays up to 20% interest through a needing and borrowing protocol called “Anchor.” SEC claims the defendants marketed these assets to seek their benefit by a continuous assertion that the tokens increased in value.
The lawsuit further stresses that the defendants misled investors through their claim of a strategic collaboration with a Korean mobile payment application that uses Terra’s blockchain to process transactions which would invalidate the value of LUNA.
The released charges claim all these promises were false and were based on Terraform and Kwon’s profit.
The SEC Chairman, Gary Gensler, stated that the defendants committed fraud by repeatedly making “false and misleading statements” about the Terra LUNA project in order to gain community trust before causing millions of dollars in losses in some cases.
Genser further explained that the public was never provided full, fair, and truthful disclosure as required for a wide range of crypto assets and securities. He congratulated the SEC investigation team for uncovering the multi-million scam that had previously evaded securities laws.
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. https://t.co/wLTa2M5P8k
— Gary Gensler (@GaryGensler) February 16, 2023
In addition, the Director of SEC’s Division of Enforcement, Gurbir S. Grewal, emphasizes that the complaint demonstrates that the Terra crypto ecosystem was not decentralized but built on a fraudulent algorithmic stablecoin, TerraUSD, whose price value was controlled by Kwon and Terraform.
The End for Terra-Like Stablecoin Creation?
As mentioned earlier, Do Kwon co-founded Terraform Labs in April 2018 and released the Luna token later that year. After two years, the crypto asset launched an algorithmic stablecoin, TerraUSD, pegged to the U.S Dollar. However, when TerraUSD went downtrend, Luna followed suit, whipping out billions of investments from the crypto space.
The collapse of TerraUSD has drawn attention to the role of stablecoin regulation. Stablecoins are unique crypto assets created to maintainable a stable price value to a fiat currency or another asset. Some stablecoins back the token with a proportional amount of the asset, and algorithms balance the markets and stabilize price movement.
Stablecoins allows seamless fiat-to-crypto transactions on several crypto exchanges and act as a store of value option for investors keen on averting inflation and value fluctuation. However, their lack of regulatory oversight has raised concerns about its global acceptance and operations.
