SEC charges Do Kwon with fraud in connection with Terra collapse
Do Kwon, co-founder and CEO of Terraform Labs, at the company’s office in Seoul, South Korea, on April 14, 2022.
Woohae Cho | Bloomberg | Getty Images
The Securities and Exchange Commission charged Terraform Labs and its CEO, Do Kwon, with fraud, alleging they orchestrated a multibillion-dollar “cryptoasset securities fraud,” the SEC said Thursday.
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 offering and sale of an “interconnected suite” of cryptos. securities, including securities-based swaps that mirrored US stocks, and most famously, the so-called “algorithmic stablecoin” TerraUSD. The company advertised UST as a “yield-bearing” coin, offering to pay interest of up to 20 percent, according to the complaint.
Like many stablecoins, UST was pegged to a 1-to-1 relationship with the dollar. Minting a new UST required “burning” or destroying a luna. This structure allowed for arbitrage opportunities that were key to maintaining the link: users could always exchange a luna for UST and vice versa at a guaranteed price of $1, regardless of the market price of both tokens at the time.
But the price of luna became volatile, forcing UST to break the $1 stick, 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 both the Securities and Exchange Act.
The SEC alleges that Kwon marketed these assets, including the mAsset swaps and Terra, as profit-making securities, “repeatedly asserting” that the tokens would increase in value.
“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 ,” SEC Enforcement Director Gurbir Grewal said in a statement.
UST had depegged once before the trading pair would eventually collapse in 2022. In May 2021, the SEC alleges, Terra fell below $1, and in response, Kwon conspired with an unnamed third party to buy massive amounts of UST to restore the “algorithmic” peg. Publicly, Kwon and Terraform claimed it as a victory for the algorithm, the SEC claimed, calling it a “black swan” event.
Kwon’s current whereabouts are unknown, but the Terra co-founder 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.
