Feb 17, 2023

SEC Charges Terraform Labs with Multibillion Dollar Crypto Fraud

The United States Securities and Exchange Commission (SEC) has recently filed a lawsuit against Terraform Labs and its founder Do Kwon for allegedly engaging in a crypto asset securities fraud. The SEC claims that Kwon and Terraform Labs offered and sold a suite of unregistered crypto assets, including the now-defunct algorithmic stablecoin, TerraClassicUSD (USTC), and its associated cryptocurrency, Terra Luna Classic (LUNC). Furthermore, the SEC has also accused Terraform Labs of issuing a governance token, Mirror (MIR), for its Mirror protocol, which lists mAssets, or crypto derivatives that mirror the stock prices of publicly traded companies.

SEC Chair Gary Gensler accused Kwon and Terraform Labs of failing to provide the public with full, fair, and truthful disclosure, particularly for USTC and LUNC. Gensler also alleged that Kwon and Terraform Labs committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors. The SEC has filed a 55-page complaint in the U.S. District Court for the Southern District of New York, charging Kwon and Terraform Labs with violations of the registration and anti-fraud provisions of the Securities Act and the Exchange Act.

The SEC complaint also stated that Terraform Labs and Kwon touted and marketed their Anchor Protocol, which promised to pay out 20% interest on USTC deposits. The SEC also alleged that Terraform Labs and Kwon misled investors about the stability of Terra’s stablecoin. In May of last year, USTC lost its peg to the U.S. dollar, causing its price and the price of LUNC to effectively collapse to zero. This resulted in a wider collapse in the digital asset market, wiping an estimated value of $40 billion.

In a statement, Gensler commended the SEC’s staff on their investigation and alleged that Kwon and Terraform Labs attempted to prevent the SEC from obtaining important information about their business. Gensler also noted that this case demonstrates the lengths to which 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 in September of last year. Following this, a Seoul court issued an arrest warrant for Kwon, and Interpol issued a Red Notice for Kwon to law enforcement worldwide. Kwon has denied he’s hiding from authorities, while Terraform Labs have claimed South Korea’s case against Kwon is “highly politicized.”

The SEC’s lawsuit against Terraform Labs and Kwon is the latest development in the crypto asset securities fraud saga, and it serves as a reminder of the importance of compliance with securities laws in the web3 space. As the crypto asset market continues to grow and evolve, it is essential for both investors and crypto firms alike to ensure they are familiar with the applicable laws and regulations in order to protect their investments. For those looking to engage in the sale of NFTs, it is important to seek the advice of a qualified NFT marketing agency or web3 agency to ensure compliance with the relevant regulations. Additionally, for those looking to promote or sell NFTs, it is important to make use of Twitter NFT marketing strategies to maximize the reach and visibility of their NFTs.

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