Terraform Fraud: Do Kwon Charged by SEC

The Securities and Exchange Commission (SEC) has charged Do Kwon, the CEO of Terraform Labs, and Terraform with orchestrating a multibillion-dollar crypto asset securities fraud scheme. According to the SEC, Kwon and Terraform raised billions of dollars from investors by offering and selling an “inter-connected suite” of crypto asset securities, including securities-based swaps that mirrored U.S. equities as the so-called “algorithmic stablecoin” TerraUSD.

Kwon and Terraform allegedly marketed these assets as profit-bearing securities, with Kwon repeatedly claiming that the tokens would increase in value.

Terraform advertised UST as a “yield-bearing” coin, offering to pay interest of up to 20%. Like many stablecoins, UST was pegged at a 1-to-1 ratio with the dollar. Minting one new UST required “burning,” or destroying, one luna. This structure allowed for arbitrage opportunities that were key to maintaining the peg.

However, the price of luna grew unstable and forced UST to break its $1 peg, which led to the collapse of TerraUSD and its sister coin, luna. The SEC alleges that Kwon conspired with an unnamed third party to purchase massive amounts of UST and restore the “algorithmic” peg. Kwon and Terraform claimed it as a victory for the algorithm, but the SEC alleged it was a “black swan” event.

The complaint against Kwon and Terraform charges both with violating the registration and anti-fraud provisions of both the Securities and Exchange Acts.

Gurbir Grewal, SEC enforcement director, stated that the action 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.