The U.S. Securities And Exchange Commission has taken action against Terraform Labs’ CEO Do Kwon for his role in a multi-billion-dollar fraud involving the algorithmic stablecoin TerraUSD (UST). According to the Regulator, Kwon transferred more than 10,000 bitcoins from the Terra ecosystem to a wallet that wasn’t on a digital exchange when UST started crashing last May.
Key Takeaways
- The SEC has taken legal action against Terraform Labs and Kwon for their alleged involvement in a multi-billion-dollar securities fraud.
- The Regulator has deemed Terraform’s ‘mAssets’ and its TerraUSD algorithmic stabilitycoins are securities.
- TerraUSD and the related cryptocurrency LUNA were destroyed in May 2022.
TerraUSD Was Fraud, Not DeFi
TerraUSD was a stablecoin having a 1:1 peg against the U.S. dollars, maintained via another cryptocurrency, LUNA. An algorithm converts LUNA into UST or USTto LUNA in order to manage supply and maintain the peg. The LUNA was also destroyed in May, wiping out nearly $18 billion worth of debt in the process and drastically reducing Terra’s market value, jolting the industry in a foretaste of the FTX meltdown that brought it to its knees.
“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 and his ability to move large amounts of Bitcoin from one place to another. When Terra UST collapsed, Kwon allegedly turned the ecosystem into a cold pocket. Moreover, investors were reportedly misled by false promises of high returns according to the SEC.
“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 investor funds,” said Grewal. “We allege that Kwon moved over 10,000 bitcoin from the Terra ecosystem to a wallet that wasn’t on a digital exchange when UST started crashing last May,”
The United States Securities and Exchange Commission (SEC) recently announced a lawsuit against Terraform’s founder, Do Kwon, for the removal of 10,000 Bitcoin from the Terra and Luna ecosystem. According to the SEC, this caused an estimated $100 million in losses for U.S. investors. Kwon’s whereabouts are currently unknown and the lawsuit will be a step to bring him to justice.
The SEC further alleges that Kwon and his employees made false promises to investors, such as a 20% return on investments using the Anchor Protocol. SEC chair Gary Gensler stated that Terraform had not provided the public with full and accurate disclosure, which has caused yet more losses for investors.
The SEC has recently taken action against cryptocurrencies, such as Kraken, Ripple, and others. All of this is part of their plan to determine whether cryptocurrencies are securities or not. The lawsuit against Terraform could set a precedent in determining what a security is.
