SEC Sues Terraform Labs and Do Kwon For Inducing Investors on TerraUSD Stablecoin

On Thursday, the U.S. Securities and Exchange Commission sued Terraform Labs and Do Kwon, co-founders of TerraUSD stablecoin.

According to the SEC, Terraform and Kwon allegedly misled investors about a variety of issues. Kwon used TerraUSD for payments and called both the yield-bearing Anchor protocol and the LUNA token “crypto assets securities.” According to the complaint. Terraform and Kwon are being charged by the SEC with fraud, selling securities that were not registered, and selling security-based swaps that were not registered.

The suit stated that Terraform and Kwon had also misled investors about Terraform’s most important aspect – the stability UST, the algorithmic stablecoin’ that is purportedly pegged at the U.S. Dollar. “UST’s price dropping below $1.00 ‘peg’ would spell doom to the entire Terraform ecosystem, as UST and LUNA have no reserves of assets or other backing.”

Bloomberg First reported that Terraform would be sued by the SEC on Thursday.

Kwon and Terraform were accused of working with a U.S. trading company, which was not identified, to restore UST’s peg following its fall of nearly 10 cents in 2021. Terraform provided LUNA tokens to the trading company that purchased large amounts of the UST token.

Terraform and Kwon made materially misleading statements about the restoration of UST’s dollar peg almost immediately after UST recovered in May 2021. Terraform and Kwon emphasized the effectiveness of the algorithm underlying UST in keeping UST pegged at the dollar – misleadingly omitting what caused UST’s repeg: The deliberate intervention of the U.S. Trading Firm.” the complaint stated.

Last year’s collapse of TerraUSD led to a flood of bankruptcies within the crypto industry.

Terraform Labs stated to Bloomberg that it had not been contacted directly by the SEC regarding the action. The SEC, however, declined to comment to Bloomberg.

In a press releaseGurbir Grewal, SEC Director for Enforcement, stated that the project was neither decentralized nor funded.

He stated that it was a fraud supported by an algorithmic “stablecoin” – the price of which was controlled not by any code but by the defendants.

UPDATE (Feb. 16, 20,23, 22:10 UTC). Adds additional detail.

By David Warsh

David Warsh is a leading expert in the field of cryptocurrency and blockchain technology. With over a decade of experience in the industry, he has a deep understanding of the intricacies of digital currencies and the potential they hold for revolutionizing various industries.