SEC Charges Terraform Labs CEO Do Kwon with Multibillion-Dollar Crypto Fraud

SEC Charges Terraform Labs CEO Do Kwon With Multibillion-Dollar Crypto Fraud

The US Securities and Exchange Commission (SEC) has charged crypto developer Do Kwon and his company Terraform Labs with defrauding investors in a multibillion-dollar scheme. According to the filing in the Southern District of New York, Kwon and Terraform Labs are accused of raising billions of dollars from investors starting in April 2018 by selling a series of interconnected digital assets, many of which were unregistered securities. The SEC alleges that Kwon marketed those assets as profit-bearing securities, “repeatedly claiming” the tokens would increase in value.

Kwon founded blockchain platform Terraform Labs and was the primary developer of two cryptocurrencies, TerraUSD and Luna. Both tokens lost nearly all their value when TerraUSD slipped below its 1:1 dollar peg in May 2022. Prior to its collapse, TerraUSD had a market cap of more than $18.5 billion and was the tenth-largest cryptocurrency. The market turmoil that ensued after the collapse of TerraUSD led to the failure of several major crypto companies, including US crypto lender Celsius Network and Singapore-based crypto fund manager Three Arrows Capital.

The SEC alleges that Kwon and Terraform Labs misled investors about the stability of UST, the algorithmic stablecoin that was supposed to maintain a 1:1 peg to the US dollar, and claimed that the firm’s crypto tokens would increase in value. Globally, investors in TerraUSD and Luna lost an estimated $42 billion, according to blockchain analytics firm Elliptic.

The complaint against Kwon and Terraform was filed in federal court for the Southern District of New York in Manhattan and charges both with violating the registration and anti-fraud provisions of both the Securities and Exchange Acts. The SEC claims that Kwon and Terraform orchestrated a multibillion-dollar “crypto asset securities fraud” by offering and selling an “inter-connected suite” of crypto asset securities, including securities-based swaps that mirrored US equities, and the so-called “algorithmic stablecoin” TerraUSD, which was marketed as a “yield-bearing” coin, offering to pay interest of up to 20 percent, according to the complaint.

The collapse of TerraUSD and Luna was caused by the unstable price of luna, which forced UST to break its $1 peg, leading to the collapse of both tokens. Minting one new UST required “burning,” or destroying, one luna. This structure allowed for arbitrage opportunities that were key to maintaining the peg: users could always swap one luna for UST and vice versa at a guaranteed price of $1, regardless of the market price of either token at the time.

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. The SEC’s complaint against Kwon and Terraform Labs once again highlights that the agency looks to the economic realities of an offering, not the labels put on it.

In a statement, SEC Chair Gary Gensler said, “This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws, but it also demonstrates the strength and commitment of the SEC’s dedicated public servants.” The SEC’s enforcement director, Gurbir Grewal, added, “Today’s action not only holds the defendants accountable for their roles in Terra’s collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets but once again highlights that we look to the economic realities of an offering, not the labels put on it.”

In conclusion, the SEC has charged Do Kwon and Terraform Labs with a multibillion-dollar “crypto asset securities fraud” and violating the registration and anti-fraud provisions of both the Terraform Labs and Kwon have not yet responded to the charges. It is also unclear whether Kwon will face extradition to South Korea to face charges there.

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ABOUT THE AUTHOR

Kristina Knight-1
Kristina Knight, Journalist , BA
Content Writer & Editor
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Kristina Knight is a freelance writer with more than 15 years of experience writing on varied topics. Kristina’s focus for the past 10 years has been the small business, online marketing, and banking sectors, however, she keeps things interesting by writing about her experiences as an adoptive mom, parenting, and education issues. Kristina’s work has appeared with BizReport.com, NBC News, Soaps.com, DisasterNewsNetwork, and many more publications.