SEC charges Terraform Labs and founder Do Kwon with defrauding investors

The US Securities and Exchange Commission has charged the collapsed blockchain firm and stablecoin operator Terraform Labs and its founder Do Kwon with defrauding U.S. investors who purchased the digital assets Terra USD and Luna.

The US financial regulator accused Kwon and the Singpoare-based crypto firm of offering and selling an inter-connected suite of crypto asset securities, "many in unregistered transactions" from April 2018 to May 2022. The SEC also alleged in federal court that the firm and its founder misrepresented the stability of Terra USD, a stablecoin developed by Kwon, which was supposed to maintain its 1-to-1 peg to the U.S. dollar through its sister token Luna.

Kwon and Terraform also misled investors with false statements about the Korean mobile payment app Chai when they claimed Chai used Terraform to settle transactions, according to the filing (PDF) in the federal court. But in fact, Chai payments did not use the Terraform blockchain to process payments, according to the lawsuit.

The collapse of UST in 2022 led to the wiping out of at least $40 billion in market value, which set off a domino effect, triggering industry-wide bankruptcies from Three Arrows Capital to FTX. (Though both Three Arrows Capital and FTX did plenty of other shenanigans as well.)

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The SEC also said that Terraform's UST dropped below $1 in May 2021 for the first time and Kwon and Terraform confidentially discussed with a third party, who could have purchased an enormous amount of UST, to reinstate the $1 peg. After restoring the peg, Kwon and his firm marketed it as "a triumph of decentralization and the 'automatically self-healing' UST/Luna algorithm" without disclosing the third-party intervention to revive the UST price, the agency said.

".. the defendants attempted to prevent us from obtaining important information about their business," SEC Chair Gary Gensler said in a statement.

Earlier this month, prosecutors in South Korea traveled to Serbia, which has emerged as a likely place where Kwon is staying. His whereabouts remain unknown after Interpol issued a red notice for Kwon in September.

"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 shock waves through the crypto markets," said Gurbir S. Grewal, director of the SEC's division of enforcement. "As alleged in our complaint, the Terraform ecosystem was neither decentralized nor finance. It was simply a fraud propped up by a so-called algorithmic 'stablecoin' -- the price of which was controlled by the defendants, not any code."