The US Securities and Exchange Commission filed charges against Singapore-based Terraform Labs PTE Ltd and Do Kwon on Feb. 17, accusing them of perpetrating a scam involving algorithmic stablecoins and other crypto asset securities that totaled multiple billion dollars.
According to the complaint filed by the SEC, Terraform and Kwon raised billions of dollars from investors between April 2018 and May 2022, when the scheme finally came crashing down. The crash has so far been linked with several parties. Per SEC, they did this by offering and selling an interconnected suite of crypto asset securities, the majority of which were conducted in unregistered transactions.
These included “mAssets,” which are security-based swaps intended to pay returns by replicating the price of assets of US companies, and Terra USD (UST), a cryptocurrency asset security attributed to as an “algorithmic stablecoin.” Terra USD (UST) was supposed to have maintained its peg to the U.S. dollar by being interchangeable with another one of the defendants’ crypto asset securities called LUNA.
Both of these products were included in the investigation. In addition, the lawsuit claims that Terraform and Kwon provided and sold investors alternative ways to participate in their cryptocurrency business. These allegedly include the crypto asset security tokens known as MIR (also known as “mirror” tokens), as well as LUNA itself.
According to the SEC’s lawsuit, Terraform and Kwon misrepresented the value of their tokens while selling them as securities to investors. They promoted UST, for instance, as a “yield-bearing” stablecoin that would pay up to 20% interest through the Anchor Protocol.
The SEC further says that Terraform and Kwon lied to and mislead investors when they promoted the LUNA token by saying that a prominent Korean mobile payment app utilized the Terra blockchain to settle transactions, which would increase the value of the token.
Meanwhile, investors claim that Terraform and Kwon lied to them regarding UST’s security. The price of UST and its sibling tokens almost hit zero in May 2022 when they were depegged from the US dollar.
According to Gary Gensler, Terraform and Do Kwon lied to investors about a number of different crypto asset instruments, including LUNA and Terra Dollar. Gensler claims that the fraud was perpetrated by the defendants through their use of materially false and misleading representations made repeatedly to induce investors to put money into the company.
SEC Enforcement Director Gurbir S. Grewal also said that the announcement not only holds the defendants responsible for their roles in Terra’s collapse, which severely damaged both retail and institutional venture capitalists and sent tremors through the cryptocurrency market but once again emphasizes the need for them to focus to the economic circumstances of an offering and not the labels put on it.
“Our lawsuit states that the Terraform ecosystem is neither decentralized nor financially viable. The so-called “stablecoin,” whose value was determined by the defendants and not by code, was really only a front for a scam.”
SEC Enforcement Director Gurbir S. Grewal