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The U.S. Securities and Exchange Commission (SEC) has accused Terraform Labs and its founder Do Kwon of building a “paper house” ready to collapse and deceiving investors about the stability of a cryptocurrency.
The cryptocurrency named LUNA, which the SEC mentioned, was one of the main actors of the cryptocurrency market decline in 2022.
The SEC also alleges that Kwon and Terraform Labs misled investors in 2021 about the stability of TerraUSD, a stablecoin designed to maintain the value of $1. The regulator also accuses them of falsely claiming that Terraform's blockchain was used in a popular Korean mobile payment app.
“Terra was a fraud, a house of cards, and when it collapsed, investors lost almost everything,” SEC attorney Devon Staren said at the hearing.
Kwon will not attend the hearing. Kwon was arrested in Montenegro last March and is awaiting extradition to his home country, South Korea, on charges against him. His extradition was postponed by the Montenegrin court after the prosecutor's office expressed concerns about the process. Federal prosecutors in New York have also charged Kwon with fraud and are seeking his extradition to the United States. Kwon was recently placed under house arrest.
The SEC estimates that investors lost more than $40 billion combined in the two tokens when TerraUSD failed to peg to the dollar in May 2022. The collapse of these two tokens also reduced the value of other cryptocurrencies, including Bitcoin, and caused wider destruction in the crypto market, causing several companies to file for bankruptcy in 2022.
The SEC alleges that Kwon and Terraform secretly arranged for a third party to purchase large amounts of TerraUSD to support the price when that stablecoin lost its peg a year ago in May 2021. The regulator said Kwon incorrectly attributed the recovery to the reliability of TerraUSD's algorithms.
The SEC also alleges that Kwon and Terraform falsely represented that the Terraform blockchain was used to process and settle transactions between customers and merchants on the Chai payment application.
Kwon and Terraform denied wrongdoing and said the SEC took statements from Kwon and other Terraform employees out of context.
The SEC is seeking financial penalties and orders barring Kwon and Terraform from the securities industry. U.S. District Judge Jed Rakoff gave the SEC a partial win in December, ruling that Terraform Labs illegally sold digital assets without registering them as securities.
The judge has not yet determined the amount of damages Terraform must pay, but the company, which filed for bankruptcy protection in January, said a penalty could exceed its assets.
*This is not investment advice.