The US Securities and Exchange Commission is suing the company behind TerraUSD, the crypto stablecoin that collapsed last year leading to an industry crisis and high-profile bankruptcy.
The SEC charged in federal court on Thursday that Terraform Labs, the company behind the token, and co-founder Do Kwon offered and sold unregistered securities and engaged in a fraudulent scheme that wiped out at least $40 billion in market value, including serious. losses for retail and institutional investors.
The agency accused the company and Kwon of misleading investors, including about the stability of the TerraUSD stablecoin, which was marketed as maintaining a 1-to-1 peg to the US dollar.
“Terraform Labs has not been contacted about these proceedings by the SEC and therefore cannot comment,” the company said in a statement to Bloomberg when asked before the SEC filed the lawsuit.
TerraUSD, or UST, is supposed to maintain the peg through algorithms and trades in a sister token called Luna — an experiment that failed miserably when the stablecoin collapsed last May, triggering a massive selloff. The implosion of the token caused a domino effect in the crypto market. It directly, or indirectly, led to the bankruptcy of prominent companies, including the hedge fund Three Arrows Capital, Voyager Digital, and, most notably, Alameda Research and Sam Bankman-Fried’s FTX.
Meanwhile, the SEC’s case is an important development in Washington’s regulatory crackdown as Wall Street’s main regulator will effectively assert jurisdiction over certain stablecoins, which are an essential part of how the crypto market functions.
Even before the collapse of FTX, the US government has been grappling with how best to regulate stablecoins, which the Treasury Department and other agencies have warned could pose a risk to the wider financial system if people start using them as a form of payment. The 2021 report calls for token issuers to be regulated like banks and lawmakers are already working on legislation to set up fences.
Jostling between US agencies over jurisdiction continues and efforts by the SEC to assert more control have generated some criticism. Concerns about the agency’s efforts have been heightened after Paxos Trust Co announced this week that the agency told them it would likely face enforcement action over the issuance of the Binance USD-branded stablecoin.
Unlike UST, which uses algorithms and trader incentives to maintain its value, the Paxos-issued tokens will be backed by cash and other liquid assets.
According to securities laws, virtual currencies may come under the authority of the SEC if Americans buy them to finance companies or projects with the expectation of profiting from the venture involved. The determination is based on a 1946 US Supreme Court decision defining investment contracts.
The SEC is increasing pressure on co-founder Kwon, who in a separate matter famously received an SEC subpoena while attending an industry conference in New York in 2021.
Kwon’s current whereabouts are unknown. South Korean authorities have been looking for him in connection with an arrest warrant issued last September on charges including violating capital market laws. He has denied any previous wrongdoing on social media.
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