SEC announces lawsuit against Terra blockchain creator Do Kwon

Feb. 16 (UPI) — The Securities and Exchange Commission announced on Thursday that it had filed a lawsuit against Do Kwon, the creator of the blockchain protocol Terra.

Kwon allegedly orchestrated a $40 billion securities fraud scheme that caused “devastating losses to US individuals and institutional investors,” the SEC said in a complaint filed in US federal court in Manhattan.

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The SEC said Kwon and his company, Terraform, offered and sold crypto-asset securities in “unregistered transactions” that were billed as “profit-seeking investments” with promised returns of up to 20% interest.

“[His] efforts to attract investors and increase the size and value of Terraform’s ‘ecosystem’ were initially successful,” the SEC said in the complaint.

“As of April 2022, one of Terraform’s crypto-asset securities, the LUNA token, had a market capitalization among the 10 highest in the world for crypto-assets.”

The lawsuit stems from the collapse of TerraUSD, a sister cryptocurrency to LUNA sold by the company that has a 1-to-1 relationship with the dollar. The SEC accused Kwon of misleading investors about the stability of TerraUSD, which is also known as UST.

“In May 2022, UST decoupled from the US dollar and the price of it and its sister tokens fell to near zero,” the SEC said in a press release Thursday.

Kwon was also accused in the complaint of “repeatedly” and “falsely” telling investors that a popular electronic mobile payment application in South Korea called Chai used the Terraform blockchain to process transactions between consumers and merchants.

“In reality, Chai Payments did not use the blockchain to process and settle payments,” the lawsuit states.

“Defendants deceptively replicated Chai payments to the Terraform blockchain to make it appear as if they occurred on the Terraform blockchain, when in fact Chai payments were made through traditional means.”

Officials in South Korea issued an arrest warrant for Kwon in September, Bloomberg News reported, while Kwon tweeted that he “wasn’t ‘on the run’ or anything like that”.

SEC officials noted in the complaint that Kwon’s whereabouts are currently unknown and that South Korean police even traveled to Serbia earlier this month in an effort to find him.

“Today’s action not only holds the defendants accountable for their roles in Terra’s collapse, which devastated both private and institutional investors and sent shockwaves through the crypto markets, but underscores once again that we look at the financial realities of an offering, not the labels on it ,” said Gurbir Grewal, director of the SEC’s Division of Enforcement.

“As alleged in our complaint, the Terraform ecosystem was neither decentralized nor financial. It was simply a scam backed by a so-called algorithmic ‘stablecoin’ – the price of which was controlled by the defendants, not any code.”