The U.S. Securities and Exchange Commission sued Terraform Labs and its CEO Do Kwon for a multi-billion dollar fraud involving the algorithmic stablecoin TerraUSD (UST) and said Kwon transferred more than 10,000 bitcoin from the Terra ecosystem to a wallet that wasn’t on a digital exchange when UST started crashing last May.
- The SEC sued Terraform Labs and Kwon for orchestrating a multi-billion dollar securities fraud.
- The regulator said Terraform’s 'mAssets' and its TerraUSD algorithmic stablecoin are securities.
- TerraUSD and related cryptocurrency LUNA collapsed in May 2022.
TerraUSD Was Fraud, Not DeFi
Terra and LUNA collapsed in May, erasing almost $18 billion of Terra’s market value and jolting the industry in a foretaste of the FTX meltdown that brought it to its knees.
TerraUSD was a stablecoin with a 1:1 peg to the U.S. dollar maintained through another cryptocurrency, LUNA. An algorithm would convert LUNA to UST or UST to LUNA to manage supply and keep the peg intact.
"The Terraform ecosystem was neither decentralized, nor finance,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “It was simply a fraud propped up by a so-called algorithmic 'stablecoin'—the price of which was controlled by the defendants, not any code.”
Terraform and Kwon Illegally Sold Securities
The SEC’s suit reiterated the regulator’s stance that stablecoins are securities and their sale, if not registered with the SEC, violates federal securities laws. It also took aim at Kwon for moving large amounts of bitcoin from the Terra ecosystem into a cold wallet as UST collapsed. Finally, the SEC said Terraform and Kwon misled investors with false promises of high returns.
Terraform and Kwon “offered and sold crypto asset securities in unregistered transactions and perpetrated a fraudulent scheme that led to the loss of at least $40 billion of market value, including devastating losses for U.S. retail and institutional investors,” the SEC said. That includes the sale of crypto securities called ‘mAssets,’ which were swaps that mirrored the price of stocks of U.S. companies.
Terraform and Kwon Removed 10,000 Bitcoin
Terraform and Kwon removed 10,000 bitcoin from the Terra and Luna ecosystem, according to the SEC, and ultimately moved them to a bank in Switzerland. Since June, about $100 million has been withdrawn, the regulator alleged.
Kwon’s whereabouts are unknown, as the SEC noted, and the suit could present a renewed effort to bring the Terraform founder to justice. South Korean authorities are conducting their own investigations.
Terraform Misled Investors with False Promises
The SEC alleges that the CEO and the company advertised returns as high as 20% for investors who deposited their UST using what Terra and Kwon called the Anchor Protocol.
"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 for investors," said SEC chair Gary Gensler.
What SEC's Focus on Crypto Means for Stablecoins?
The suit is the latest effort by regulators to scrutinize cryptocurrency. The SEC won a $30 million settlement from crypto exchange Kraken that forced the company to shutter its U.S. staking business last week.
The SEC also sued Ripple, in a move that could determine whether cryptocurrencies are securities. The regulator is maintaining Gensler’s stance that most cryptocurrencies are securities until that case is decided.
Former CFTC employee and now Web3 lawyer Mike Selig tweeted that an SEC decision to categorize UST as a stablecoin could set a precedent for anything to be considered a security.