Feb 17, 2023

SEC Charges Terraform Labs Founder with $Multi-Billion Crypto Fraud

The United States Securities and Exchange Commission (SEC) has recently filed a lawsuit against Singapore-based Terraform Labs PTE Ltd and its founder Do Hyeong Kwon, accusing them of orchestrating a multi-billion dollar crypto asset securities fraud. The SEC’s statement, released on Feb. 16, claims that Kwon and Terraform sold an “inter-connected suite of crypto asset securities, many in unregistered transactions.”

The SEC’s complaint specifically references Terraform Labs’ now-collapsed algorithmic stablecoin, TerraClassicUSD (USTC), and its connected cryptocurrency, Terra Luna Classic (LUNC). The SEC also took issue with mAssets, crypto derivatives that mirror the stock price of publicly listed companies, and Terraform’s issuance of Mirror (MIR), a governance token for the Mirror protocol that lists mAssets.

SEC chair Gary Gensler said in a statement that Kwon and Terraform “failed to provide the public with full, fair, and truthful disclosure.” He added that the defendants “committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”

The SEC’s 55-page complaint, filed in the U.S. District Court for the Southern District of New York, charges Terraform and Kwon with violating the registration and anti-fraud provisions of the Securities Act and the Exchange Act. The SEC’s complaint alleges that Terraform and Kwon “touted and marketed” its Anchor Protocol, which at one point was advertised to pay out 20% interest on USTC deposits. It also alleged Terraform and Kwon misled investors about the stability of Terra’s stablecoin.

Unfortunately, USTC lost its peg to the U.S. dollar in May of last year, causing its price — and the price of LUNC — to effectively collapse to zero. This resulted in a wider collapse in the digital asset market that wiped out an estimated value of $40 billion.

Gensler commended the SEC’s staff on their investigation and warned of the lengths some crypto firms will go to avoid complying with the securities laws. Kwon, a South-Korean national, is currently at large and believed to be in Serbia after leaving his residence in Singapore sometime in September following a Seoul court issuing an arrest warrant for him. Interpol reportedly issued a Red Notice for Kwon to law enforcement worldwide later in September.

Kwon has denied he’s hiding from authorities and Terraform have claimed South Korea’s case against Kwon is “highly politicized.”

The SEC’s filing of this lawsuit is a reminder that NFTs, crypto, and web3 are still subject to the same laws and regulations as other forms of investment. It is important for those interested in the web3 space to be aware of the risks associated with investing in these types of assets.

The SEC’s action also serves as a reminder of the importance of engaging in proper NFT marketing and promotion. As the NFT market continues to grow, it is essential that companies selling NFTs or engaging in NFT promotion, such as Twitter NFT marketing, work with a reputable NFT marketing agency or web3 agency to ensure compliance with the law.

Cointelegraph contacted Terraform Labs for comment but did not receive an immediate response. Do Kwon could not be reached for comment.

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