SEC charges Terra founder Do Kwon, Terraform with fraud in connection with TerraUSD Stablecoin collapse

In May 2022, TerraUSD (UST) stablecoin collapsed and lost 99% of its value, wiping out the life savings of crypto investors as traders offload the cryptocurrency. Terra was ranked among the top 10 most valuable cryptocurrencies before the collapse. A few months later, South Korea issued an arrest warrant for Terra founder Do Kwon after he went into hiding.

Fast forward almost a year later, the United States Securities and Exchange Commission (SEC) charged Do Kwon and his company, Terraform Labs, with fraud, alleging that they orchestrated a multibillion-dollar “crypto asset securities fraud,” the SEC announced Thursday.

According to the SEC’s complaint, from April 2018 until the TerraUSD scheme’s collapse in May 2022, Terraform and Kwon raised billions of dollars from investors by offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions.

These included “mAssets,” security-based swaps designed to pay returns by mirroring the price of stocks of US companies, and Terra USD (UST), a crypto asset security referred to as an “algorithmic stablecoin” that supposedly maintained its peg to the U.S. dollar by being interchangeable for another of the defendants’ crypto asset securities, LUNA.

The complaint further alleges that Terraform and Kwon offered and sold investors other means to invest in their crypto empire, including the crypto asset security tokens MIR—or “mirror” tokens—and LUNA itself. The company advertised UST as a “yield-bearing” coin, offering to pay interest of up to 20 percent, according to the complaint.

The SEC’s complaint also alleges that Terraform and Kwon marketed crypto asset securities to investors seeking to earn a profit, repeatedly claiming that the tokens would increase in value.

“For example, they touted and marketed UST as a “yield-bearing” stablecoin, which they advertised as paying as much as 20 percent interest through the Anchor Protocol. The SEC’s complaint also alleges that, while marketing the LUNA token, Terraform and Kwon repeatedly misled and deceived investors that a popular Korean mobile payment application used the Terra blockchain to settle transactions that would accrue value to LUNA. Meanwhile, Terraform and Kwon also allegedly misled investors about the stability of UST. In May 2022, UST depegged from the U.S. dollar, and the price of it and its sister tokens plummeted to close to zero,” SEC wrote.

“We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD,” said SEC Chair Gary Gensler. “We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”

“I commend the SEC’s hard-working staff who remained vigilant in such an important investigation, even when the defendants attempted to prevent us from obtaining important information about their business,” Chair Gensler added. “This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws, but it also demonstrates the strength and commitment of the SEC’s dedicated public servants.”

Like many stablecoins, UST was pegged at a 1-to-1 ratio with the dollar. Minting one new UST required “burning,” or destroying, one luna. This structure allowed for arbitrage opportunities that were key to maintaining the peg. In May 2022, the sudden collapse of Luna and TerraUSD roiled crypto markets around the world. Terra Luna, the cryptocurrency associated with TerraUSD (UST), suddenly collapsed overnight losing 99% of its value as crypto investors lost their life savings.

Kwon, who is also the founder of blockchain platform Terraform Labs, has been accused of fraud by crypto investors in the wake of the collapse.

Terra, which ranked among the top 10 most valuable cryptocurrencies, dropped from its $120 peak last month to below $1 on May 13.  Terra’s luna UST is a controversial stablecoin designed to support UST’s one-to-one peg with the U.S. dollar. The implosion of the Terra platform led to combined losses of approximately $60 billion between UST and its sister cryptocurrency luna.

According to a report from CryptoSlate, Do Kwon is hiding from the public eye after an unknown person knocked on his front door asking for him. Kwon quickly fled the scene and local police have now opened an investigation. Another post on Twitter confirmed the report saying that Kwon’s spouse has now requested police protection.