SEC Charges Terraform Labs and Do Kwon for $40B Crypto Fraud

The United States Securities and Exchange Commission (SEC) has charged Terraform Labs, the company behind Terra blockchain protocol, and its co-founder Do Kwon for operating a multi-billion dollar fraudulent crypto scheme.

In a press release on Thursday, February 16^th, SEC said that Terraform Labs and its co-founder “orchestrated a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.”

Today we charged Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon with orchestrating a multi-billion-dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.

— U.S. Securities and Exchange Commission (@SECGov) February 16, 2023

Fraud that Wiped Out $40B

According to the SEC complaint filed in the United States Southern District of New York:

“From at least April 2018 through May 2022, Terraform and Kwon offered and sold crypto assets securities in unregistered transactions and perpetrated a fraudulent that scheme that led to the loss of at least $40 billion of market value, including devastating losses for U.S. retail and institutional investors.”

These unregistered securities were a suite of inter-connected crypto assets that included mAssets, crypto derivatives that mirror the stock price of publicly listed companies, now collapsed algorithmic stablecoin Terra USD (UST), and native token LUNA.

The defendants raised billions by promoting and selling these assets as profit-seeking investments, repeatedly claiming that the tokens would increase in value. They misled investors by touting UST as the yield-bearing stablecoin through Terraform-developed Anchor Protocol, which promised to yield 19-20% interest.

To help appreciate the value of the native Terra coin LUNA, now called Terra LUNA Classic (LUNC), they misled investors by saying that Chai, a popular Korean mobile payment application, leveraged the Terra blockchain network to facilitate commercial payments between merchants and customers. But in reality, Chai never used Terra.

Recalling the event of UST de-peg in May 2022, SEC alleged that Terraform lied about the stability of its stablecoin. It was promoted as an algorithmic stablecoin pegged to $1. In reality, the algorithm never had the ability to restore the peg to $1, in case it falls below $1.00, as UST and LUNA had no reserve of assets or any other backing.

In May 2021, UST de-pegged for the first time but the company was able to restore to peg as a third-party purchased a massive amount of UST. UST de-pegged again in May 2022 due to selling pressure from UST whales. But this time, with no one to rescue them, the price of UST and LUNA plummeted to nearly zero.

This devastating event wiped out $40 billion from the market, with many retail investors losing their life savings. This led to a crypto winter that doomed many crypto giants and ate up thousands of jobs.

SEC has charged the defendants with “violating the registration and anti-fraud provisions of the Securities Act and the Exchange Act.”

Do Kwon is at Large

Terraform co-founder Do Kwon, a South Korean national, has been at large since September following an arrest warrant issued by a Seoul court. He is believed to be in Serbia and, as reported, South Korean authorities have launched a manhunt by seeking a partnership with the Serbian government.