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Crypto Emperor’s New Clothes: SEC Charges Terraform Labs and CEO Do Kwon for Alleged Securities Fraud

It had been almost a year since the algorithmic stablecoin Terra USD lost its peg, and the cryptocurrency market was still reeling from the tens of billions of dollars of investor money that had evaporated into thin air. But on Thursday, the Securities and Exchange Commission (SEC) filed charges against Terraform Labs and its CEO Do Kwon, alleging that they had orchestrated cryptocurrency securities fraud.

The regulators’ complaint, filed in the Southern District of New York, charged Kwon and Terraform Labs with two federal securities counts. According to the SEC, Terraform and Kwon should have registered a number of their cryptoassets with the SEC as securities, including crypto swaps on underlying equities.

Over a four-year period, Kwon and Terraform allegedly raised billions of dollars from investors by offering and selling an “inter-connected suite of crypto asset securities.” The SEC claims that Kwon offered and sold unregistered securities, including tokenized stocks, the algorithmic stablecoin Terra USD, and sister token LUNA, selling investors on opportunities “to invest in their crypto empire.”

The SEC’s complaint alleges that Kwon is responsible for causing a $40 billion rift in the crypto market, including losses for US retail and institutional investors. From April 2018 until May 2022, Terraform and Kwon marketed tokens they claimed would increase in value, including yield-bearing stablecoin UST, which was marketed as paying out as high as 20% via Anchor.

The SEC also claims that Kwon made “fraudulent misrepresentations” about Terra USD’s stability and was explicitly aware of the stablecoin’s “structural weakness.” The defendants “aggressively marketed” Terraform’s cryptocurrencies to US investors, according to the SEC, by posting information and promotional materials to accounts on several publicly accessible online social media platforms.

Kwon, who has an Interpol Red Notice out for his arrest, has been on the run since the demise of Terra last year, and his location is unknown. The South Korean native was also hit with an arrest warrant by the Seoul Southern District Prosecutor’s Office four months after Terra’s implosion. Terraform employees, including former head of research Nicholas Platias and staff member Han Mo, were also issued arrest warrants at the time.

The charges against Kwon and Terraform Labs are a stark reminder of the potential pitfalls of investing in cryptocurrency. While the technology and its associated assets are still in their infancy, there are risks involved, and investors should always do their due diligence before investing in any cryptocurrency.

Adotat Staff
Adotat Staff
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