Do Kwon, co-founder and chief executive officer of Terraform Labs, at the company’s office in Seoul, South Korea, April 14, 2022.
Woohae Cho | Bloomberg Getty Images
The Securities and Exchange Commission charged Terraform Labs and its CEO, Do Kwon, with fraud, alleging that they masterminded a “multibillion-dollar crypto-asset securities fraud,” the SEC said Friday.
Kwon and Terraform allegedly planned from April 2018 until the collapse of TerraUSD, also known as UST, and its sister coin luna in May 2022 to raise billions of dollars from investors through the offer and sale of an “interconnected suite” of crypto. asset securities, including swap-based securities that mirror US equities, and most famously, the so-called “algorithm stablecoin” TerraUSD. The company advertised UST as a “yielding” coin, offering to pay up to 20 percent interest, according to the complaint.
Like many stablecoins, UST is pegged at a 1-to-1 ratio to the dollar. Minting one new UST requires “burning,” or destroying, one luna. This structure allows arbitrage opportunities that are key to maintaining the peg: Users can always exchange one luna for UST and vice versa at a guaranteed price of $1, regardless of the market price of one of the tokens at that time.
But the price of luna grew stable and forced UST to break its $1 peg, an effort that sent both terra and luna spiraling.
The complaint against Kwon and Terraform was filed in federal court for the Southern District of New York in Manhattan, alleging violations of the registration and anti-fraud provisions of the Securities and Exchange Acts.
The SEC stated that Kwon was selling these assets, including mAsset and Terra swaps, as profitable securities, “repeatedly claiming” the tokens would increase in value.
“Today’s action not only makes the defendants responsible for their role in the collapse of Terra, which harmed retail and institutional investors and sent a shock wave through the crypto market, but once again highlights that we are looking at the economic reality of the offer, not the label. Install,” the director of enforcement SEC Gurbir Grewal said in a statement.
UST has been depegged once before the trading pair will finally collapse in 2022. In May 2021, the SEC stated, Terra fell below $1 and in response, Kwon conspired with an unnamed third party who bought a lot of UST to restore the “algorithm” peg. In general, Kwon and Terraform claimed it was a victory for the algorithm, according to the SEC, and called it a “black swan” event.
Kwon is currently unknown, but the founder of Terra was recently believed to be in Serbia, according to South Korean intelligence. Kwon is wanted in South Korea for his involvement in the collapse of TerraUSD.