On Feb. 16, the U.S. Securities and Exchange Commission (SEC) charged Terraform Labs, the Singapore-based company behind the creation of LUNA and UST, the native token of the Terra ecosystem, and its co-founder Do Kwon, with facilitating billions of dollars in investments through the use of crypto assets. Issuing and selling unregistered securities for dollar fraud.
The SEC lawsuit, filed in the U.S. District Court for the Southern District of New York, alleges that Kwon and Terraform ran a fraudulent scheme that caused billions of dollars in losses to retail and institutional investors using different investment channels.
The SEC alleges that the defendants sold unregistered crypto-asset securities for their own benefit “through repeated claims that the tokens increased in value.”
Terraform advertises its stablecoin UST as “yielding,” paying up to 20% interest through a lending protocol called “Anchor.” According to the agency, they “repeatedly misled investors” by claiming they were working with a South Korean mobile payment app that used Terra’s blockchain to settle transactions that would void the value of LUNA.
The SEC claims that all of these promises are false and are only seeking Terraform's and Kwon's personal gain.
In addition to Luna and UST, Terra also offers other investments such as “mAssets” and MIR tokens, which are also labeled as securities by the SEC. mAssets are basically tokenized versions of stocks, while MIR is the native token of Mirror Protocol, a DEX built on top of the Terra blockchain.
Defendants made deceptive arguments to further their fraudulent conduct. SEC Chairman Gary Gensler said the defendants constituted fraud by making "false and misleading statements" about the Terra LUNA project to build community trust, resulting in millions of dollars in damages in some cases. Gensler congratulated the SEC on its investigative work, showing the extent to which a cryptocurrency company can pull off a multimillion-dollar scam and evade securities laws.
Gurbir S. Grewal, Director of the SEC's Division of Enforcement, emphasized that the complaint shows that the Terra ecosystem is not decentralized at all, but rather "a fraud backed by a so-called algorithmic 'stablecoin' (UST) whose price" is controlled by the defendants, not any code. "
This is not the first time Do Kwon has been blamed for the collapse of Terra LUNA and UST. In July 2022, South Korean authorities reportedly raided Kwon’s Seoul offices and launched an investigation into TFL, the company behind the Terra stablecoin. The investigation was sparked by allegations that the company has been manipulating the price of its LUNA token through wash trading and other illegal activities.
As of September 2022, the investigation is reportedly still ongoing. As of today, Do Kwon is a fugitive allegedly hiding in Serbia, but despite an Interpol red notice for him, he has repeatedly assured that he is not evading the authorities.
The recent plunge of the Terra stablecoin has once again brought attention to the issue of stablecoin regulation. Stablecoins are digital assets designed to maintain a stable value relative to fiat currencies or other assets; some back their tokens by holding a percentage of the underlying asset, while others use algorithms to balance the market and stabilize prices -UST falls into this category.
Stablecoins facilitate fiat-to-cryptocurrency transactions on exchanges and provide users with a stable store of value. Still, their lack of regulation has raised concerns among regulators around the world.
