- Kwon and Terraform charged with selling unregistered securities, perpetrating fraud
- A US trading firm, not the algorithm, restored UST's peg after it lost 10 cents in May 2021
The US Securities and Exchange Commission (SEC) has filed a lawsuit against Terraform Labs and Do Kwon, its cofounder. Terraform is the company behind LUNA cryptocurrency and the failed TerraUSD stablecoin (UST).
Kwon and Terraform misled investors
Allegedly, Kwon and Terraform deceived customers about a number of issues, including the real users of the stablecoin for the purpose of making payments. SEC defined both the LUNA token and the yield-bearing Anchor Protocol as crypto asset securities. The regulator wrote:
From at least April 2018 through May 2022, Terraform and Kwon offered and sold crypto asset securities in unregistered transactions and perpetrated a fraudulent scheme that led to the loss of at least $40 billion of market value, including devastating losses for US retail and institutional investors.
Kwon and Terraform could be charged with selling unregistered securities, perpetrating fraud, selling unregistered security-based swaps and other related crimes.
UST peg was restored by an unnamed company, not its algorithm
According to the regulator, Terraform and Kwon lied about the stability of UST. As UST had no backing or asset reserves, its price dropping below $1 for a more extended period of time would have been disastrous for the whole Terraform ecosystem.
Allegedly, Kwon and Terraform cooperated with a US trading company, which remains anonymous for now, to restore the stablecoin's peg after it lost almost 10 cents in May 2021. The company got LUNA from Terraform after buying amounts of the UST token. The SEC’s complaint went on to say:
Terraform and Kwon made materially misleading statements about how UST’s peg to the dollar was restored. Specifically, Terraform and Kwon emphasized the purported effectiveness of the algorithm underlying UST in maintaining UST pegged to the dollar – misleadingly omitting the true cause of UST’s re-peg: the deliberate intervention by the U.S. Trading Firm to restore the peg.
Eventually, UST collapsed anyway, bringing a wave of bankruptcies in the sector with it. The SEC seeks permanent injunctions to restrain the defendants from repeat violations of securities laws, to order them to pay disgorgement with prejudgment interest, to order civil money penalties, and to prohibit the defendants from participating in the purchase, offer or sale of any crypto asset security.
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