The Securities and Exchange Commission charged Terraform Labs and its CEO Do Hyeong Kwon over its algorithmic stablecoin Terra USD, which collapsed dramatically last year.
The agency said the Singapore-based company and Kwon raised billions from investors by “offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions.” That included “mAssets,” which the SEC said are security-based swaps designed to pay returns by mirroring the price of U.S. company stocks as well as the infamous Terra USD.
“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,” said SEC Chair Gary Gensler in a statement announcing the enforcement action. “We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
Algorithmic stablecoins, like Terra USD, use market incentives via algorithms to maintain a stable price. Terra was linked to Luna, a governance token, to keep the prices stable. Terra USD crashed in May, wiping out billions.
Terraform and Kwon marketed “crypto asset securities” to earn a profit, such as marketing Terra USD as a “yield-bearing” stablecoin.
The SEC said “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. Meanwhile, Terraform and Kwon also allegedly misled investors about the stability of UST.”
The agency filed a civil complaint in the U.S. District Court for the Southern District of New York.
“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,” said Gurbir Grewal, director of the agency’s enforcement division.
The company and Kwon misled investors about the stability of TerraUSD when it depegged in May 2021 — before the token's fall in May 2022, according to the SEC's complaint. The company "secretly discussed plans" with an unnamed U.S. trading firm to buy "large amounts" of Terra USD to restore the value, the SEC said.
Kwon and the company led investors to think that Terra USD's peg was restored by the algorithm, when it hadn't been. It was done by "human agents," the SEC said.
The SEC also mentioned in the complaint losses incurred by retail investors, including a pharmacist in California who borrowed $400,000 against the value of his home to buy Terra USD and a painter in Vermont who invested $20,000 in Terra USD to pay for his son's college education, before losing it all.
Updated with additional details from the complaint.
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