The Securities and Exchange Commission (SEC) has taken decisive action, charging Singapore-based Terraform Labs PTE Ltd and CEO Do Hyeong Kwon with orchestrating a multi-billion dollar crypto asset securities fraud. The alleged scheme, involving algorithmic stablecoins and various crypto securities, unfolded from April 2018 until its collapse in May 2022.
Allegations and Unregistered Transactions
According to the SEC’s complaint, Terraform and Kwon raised billions of dollars from investors through an interconnected suite of crypto asset securities. These included “mAssets,” security-based swaps mirroring the price of US stocks, and Terra USD (UST), touted as an “algorithmic stablecoin” pegged to the U.S. dollar. The SEC alleges that many of these transactions were unregistered.
Deceptive Marketing Practices
The SEC contends that Terraform and Kwon marketed these crypto asset securities by making repeated claims that the tokens would increase in value. For instance, they promoted UST as a “yield-bearing” stablecoin, promising up to 20 percent interest through the Anchor Protocol. The complaint also alleges that investors were misled about the use of the Terra blockchain in a popular Korean mobile payment application, falsely attributing value accrual to LUNA.
Devastating Losses and Depegging of UST
In May 2022, UST depegged from the U.S. dollar, leading to a catastrophic drop in its price and that of its sister tokens, nearly reaching zero. The SEC emphasizes that Terraform and Kwon’s misleading statements resulted in devastating losses for investors.
SEC Chair Gary Gensler’s Comments
SEC Chair Gary Gensler expressed concern about the lack of full, fair, and truthful disclosure by Terraform and Do Kwon, asserting that they committed fraud by disseminating false and misleading statements. Gensler highlights the dedication of the SEC’s staff in pursuing this investigation and underlines the lengths some crypto firms go to avoid complying with securities laws.
SEC’s Focus on Economic Realities
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized that today’s action holds the defendants accountable for Terra’s collapse. He underscores the SEC’s focus on economic realities in offerings, stating that the Terraform ecosystem was not decentralized or finance but a fraud controlled by the defendants.
Legal Charges and Investigation Details
The SEC has filed charges in the U.S. District Court for the Southern District of New York, accusing the defendants of violating registration and anti-fraud provisions. The investigation involved multiple SEC units, including the Complex Financial Instruments, Crypto Assets, and Cyber Units.
In a statement, Gurbir S. Grewal praised the SEC’s vigilant staff for their dedication to the investigation, even in the face of attempts by the defendants to impede the acquisition of crucial information about their business.