SEC Accuses Terraform Labs and Do Kwon of Fraud
The Securities and Exchange Commission has accused Terraform Labs, and its CEO, Do Kwon, of securities fraud related to their algorithmic stablecoin, Terra USD.
The SEC claims that the Singapore-based company and Kwon raised billions from investors by offering and selling an inter-connected suite of crypto asset securities, many of which were unregistered transactions, including “mAssets” and Terra USD.
Terraform and Kwon marketed “crypto asset securities” to earn a profit, such as marketing Terra USD as a “yield-bearing” stablecoin. Algorithmic stablecoins like Terra USD use market incentives via algorithms to maintain a stable price.
However, Terra USD crashed in May, wiping out billions, as it was linked to Luna, a governance token, to keep the prices stable.
The SEC alleges that Terraform and Kwon failed to provide full, fair, and truthful disclosure to the public for a range of crypto asset securities, most notably for LUNA and Terra USD, and committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.
The agency also claims that the company and Kwon repeatedly misled and deceived investors about the stability of UST, which is Terra USD’s ticker symbol, and about a popular Korean mobile payment application that used the Terra blockchain to settle transactions that would accrue value to LUNA.
The SEC filed a civil complaint in the US District Court for the Southern District of New York, stating that the Terraform ecosystem was neither decentralized nor finance, but instead, a fraud propped up by a so-called algorithmic “stablecoin” that the defendants controlled, not any code.
The complaint also notes that the company secretly discussed plans with an unnamed US trading firm to buy “large amounts” of Terra USD to restore the value before Terra USD’s fall in May 2022 and misled investors about the stability of Terra USD when it depegged in May 2021.
The SEC claims that the company and Kwon led investors to believe that Terra USD’s peg was restored by the algorithm when human agents did it.