The United States Securities and Exchange Commission (SEC) has launched a lawsuit against Terraform Labs and its co-founder Do Kwon, according to a recent complaint.
Terraform Labs’ created the TerraUSD stablecoin, which collapsed last year due to fraud. Regulators claim that Terraform and Kwon had defrauded investors by misleading them on who used the cryptocurrency for payments and designating LUNA and Anchor Protocol as “crypto asset securities.”
Terraform and Kwon face charges of selling unregistered securities, security-based swaps, and other offences.
The suit alleges: “Terraform and Kwon also misled investors about one of the most important aspects of Terraform’s offering – the stability of UST, the algorithmic ‘stablecoin’ purportedly pegged to the U.S. dollar. UST’s price falling below its $1.00 ‘peg’ and not quickly being restored by the algorithm would spell doom for the entire Terraform ecosystem, given that UST and LUNA had no reserve of assets or any other backing.”
Kwon and Terraform employees worked jointly with an unnamed US trading firm to resolve the digital coin’s peg to USD after dropping nearly 10 cents in May 2021.
The anonymous trading firm later acquired the UST tokens and traded them for LUNA.
SEC Complaint Details, Comments
Explaining further, the complaint continued: “Almost immediately upon UST’s recovery in May 2021, Terraform and Kwon began to make materially misleading statements about how UST’s peg to the dollar was restored.”
The two suspects also mislead invstors on the cause bhind UST’s recoupling with the USD. The digital currency later collapsed last year, triggering bankruptcies across crypto markets.
SEC Director of Enforcement, Gurbir Grewal, said in a press release: “Today’s action not only 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, but once again highlights that we look to the economic realities of an offering, not the labels put on it.”
He concluded: “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.”
