Terra/LUNA charged with multi-billion dollar fraud: “Neither decentralized, nor finance”

Rick Steves

“As alleged in our complaint, the Terraform ecosystem was neither decentralized, nor finance. It was simply a fraud propped up by a so-called algorithmic “stablecoin” – the price of which was controlled by the defendants, not any code.”

It was widely expected that the Securities and Exchange Commission would eventually sue Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon after the collapse of Terra/LUNA last year – the event that triggered an ongoing domino effect within the realm of crypto.

The SEC has now finally charged the abovementioned defendants with orchestrating a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.

SEC says Terraform and Kwon repeatedly misled and deceived investors

Terraform and Kwon raised billions of dollars from investors by offering and selling an inter-connected suite of crypto asset securities, including “mAssets,” security-based swaps designed to pay returns by mirroring the price of stocks of US companies, and Terra USD (UST), a crypto asset security referred to as an “algorithmic stablecoin” that supposedly maintained its peg to the U.S. dollar by being interchangeable for another of the defendants’ crypto asset securities, LUNA.

According to the US regulator, Terraform and Kwon marketed crypto asset securities to investors seeking to earn a profit, repeatedly claiming that the tokens would increase in value. The SEC noted, for example, that UST was marketed as a “yield-bearing” stablecoin, which they advertised as paying as much as 20 percent interest through the Anchor Protocol.

While marketing the LUNA token, the SEC alleges that Terraform and Kwon repeatedly misled and deceived investors that a popular Korean mobile payment application used the Terra blockchain to settle transactions that would accrue value to LUNA. The defendants also allegedly misled investors about the stability of UST, taking into account that UST depegged from the U.S. dollar in May 2022, with the price of it and its sister tokens plummeting to close to zero.

“The lengths to which some crypto firms will go to avoid complying…”

SEC Chair Gary Gensler, said: “We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD. We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.

“I commend the SEC’s hard-working staff who remained vigilant in such an important investigation, even when the defendants attempted to prevent us from obtaining important information about their business. This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws, but it also demonstrates the strength and commitment of the SEC’s dedicated public servants”.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, added: “Today’s action not only holds the defendants accountable for their roles in Terra’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. As alleged in our complaint, the Terraform ecosystem was neither decentralized, nor finance. It was simply a fraud propped up by a so-called algorithmic “stablecoin” – the price of which was controlled by the defendants, not any code.”

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