​SEC accuses Terraform Labs and its founder Do Kwon of crypto fraud

What’s new? On February 16, the US Securities and Exchange Commission (SEC) filed a lawsuit against Terraform Labs (TFL) and its founder Do Kwon for “orchestrating a multi-billion dollar crypto asset securities fraud.” According to the press release, TFL and Kwon misled investors about a number of issues, including the stability of the algorithmic stablecoin TerraUSD (UST). They are accused of fraud, selling unregistered securities and swaps based on them.

SEC press release

What else does the press release say? TFL and Do Kwon raised billions of dollars from investors from April 2018 until the ecosystem collapsed in May 2022 by offering and selling an “inter-connected suite” of crypto asset securities, including swaps based on them that reflected US stocks, and UST. The company advertised the stablecoin as a coin with yields as high as 20%, the complaint says.

UST was pegged to the dollar at a 1:1 ratio. Issuing a new coin required 1 LUNA to be burned. This structure allowed for arbitrage opportunities, which were key to maintaining the peg. Users could always exchange LUNA for UST and vice versa at a guaranteed price of $1, regardless of the market price of both tokens at the time.

However, the price of LUNA rose unstable and disrupted the UST peg, causing both coins to plummet. The SEC claims that Kwon offered these assets, including mAsset and Terra swaps, as profit-bearing securities, saying repeatedly that they would rise in value.

“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, but once again highlights that we look to the economic realities of an offering, not the labels put on it,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

UST lost its peg once before the trading pair finally collapsed. In May 2021, the SEC alleges, the coin’s price fell below $1, and in response, Kwon colluded with an unnamed third party that bought huge amounts of UST to restore algorithmic pegging. Publicly, Kwon and TFL claimed this as a victory for the algorithm. The SEC called the event a “black swan.”

Do Kwon’s current whereabouts are unknown, but according to South Korean intelligence he is in Serbia. The country’s authorities are negotiating his extradition.