U.S. SEC Sues Do Kwon, TerraForm Labs Over TerraUST Collapse

Terra Do Kwon

The United States Securities and Exchange Commission (SEC) has sued Terraform Labs alongside its founder, Do Kwon. Kwon and the Terraform entity allegedly orchestrated a multibillion-dollar crypto asset securities fraud. 

SEC Case Against Terraform Labs and Do Kwon

According to an official press release on February 16, 2023, the Commission alleged that Kwon offered and sold an “interconnected suite of crypto asset securities,” many in unregistered transactions to investors between April 2018 and the collapse of the blockchain last year. 

The complaint filed at the U.S. federal court for the Southern District of New York claimed that the Terraform Labs founder, who is now wanted by the South Korean authorities, generated billions of dollars from the sale of the tokens such as mAssets, a security-based swap designed to mirror the price of U.S. stocks, TerraUST, an algorithmic stablecoin and its sister token LUNA now rebranded as LUNC. 

As an algorithmic stablecoin, TerraUST was designed to maintain its 1:1 peg to the United States dollar at all times. The structure also allowed for arbitrage trading, as minting one TerraUST required burning one LUNC. 

However, troubles started in paradise when the token depegged from its $1 value and essentially amounted to zero in May, hanging investors dry. 

Do Kwon Mislead Investors

The SEC’s complaint claimed that Kwon marketed the tokens to investors as a highly profitable opportunity with a repeated promise that it would increase in value. 

The regulator said the Do Kwon-led company promoted TerraUST as a “yield-bearing” virtual asset that pays as high as 20% in return through the decentralized finance (DeFi) platform Anchor Protocol. 

Additionally, the financial watchdog alleged that Kwon deceived and misled investors while marketing LUNA, claiming that a popular Korean mobile payment application used the Terra blockchain to execute transactions for its customers which will accrue value to the token. 

“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. We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses to investors,” said SEC Chair Gary Gensler. 

Do Kwon has been charged with violating the registration and anti-fraud provisions of the Securities Act and the Exchange Act.

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