SEC charges Do Kwon, Terraform Labs with fraud over the collapse of TerraUSD

SEC charges Do Kwon, Terraform Labs with fraud over the collapse of TerraUSD

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The U.S. Securities and Exchange Commission charged Terraform Labs Pte. Ltd. and its chief executive officer, Do Kown, with “orchestrating a multi-billion dollar crypto asset securities fraud” almost a year after the meltdown of his company’s so-called “algorithmic” stablecoin TerraUSD that sent ripples through the crypto industry.

In its complaint filed on Thursday, the SEC alleged that Kwon raised billions of dollars from April 2018 until the collapse in May 2022 by offering numerous unregistered crypto securities that sought to earn a profit. The SEC said that Kwon and Terraform marketed TerraUSD as a yield-bearing asset capable of generating up to 20% profits.

A stablecoin is a type of crypto asset that attempts to maintain one-to-one parity with another currency, in the case of Terra the U.S. dollar. TerraUSD maintained its value through a specialized algorithm by being interchangeable with another cryptocurrency, Luna. By burning TerraUSD and creating Luna, or burning Luna and creating TerraUSD, it could increase or decrease the value of either currency in order to keep Terra’s value stable at $1.

This algorithmic approach to maintaining parity failed in May 2022, causing a massive crash in the value of Luna and ultimately a death spiral for the entire Terra stablecoin ecosystem. The SEC said in its complaint that this wiped out over $40 billion in combined market value.

“Today’s action not only holds the defendants accountable for their roles in TerraUSD’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,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement.

The resulting collapse led many investors to lose tremendous amounts of money including cryptocurrency hedge firm Three Arrows Capital Ltd., which co-led a $1 billion raise to protect the Terra stablecoin, but the funds were lost during the crash. Three Arrows Capital filed for bankruptcy in July as broader cryptocurrency fell. Followed shortly by crypto lender Voyager Digital Ltd. and crypto broker Celsius Network LLC.

The SEC further alleged in its complaint that Kwon had taken over 10,000 bitcoins from his company’s crypto wallets and that Terraform and Kwon had periodically transferred bitcoin from this wallet to an institution in Switzerland to convert it into cash. Between June 2022 and the date of the complaint he has withdrawn over $100 million, the SEC claims.

The SEC has been investigating Kwon for some time and the TerraUSD collapse caught the attention of authorities in South Korea for the same reason. His involvement in the meltdown of the stablecoin led to the South Korean government issuing a warrant for his arrest in September including allegations of breaching the nation’s capital markets law.

Authorities are still attempting to locate Kwon and have since issued an Interpol “red notice,” calling upon international law enforcement bodies to locate and arrest him.

Image: Pixabay

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