Last week, the Securities and Exchange Commission (SEC) charged Terraform Labs and its CEO — Do Kwon — with fraud concerning the collapse of its TerraUSD token, also known as UST. This is the latest scandal to rock the cryptocurrency industry, as the SEC alleges that Kwon and Terraform schemed from April 2018 until the collapse of TerraUSD in May 2022. This news comes just days after the SEC cracked down on crypto staking.
The SEC alleges that Terra and its CEO engaged in a multibillion-dollar securities fraud scheme that saw the issuance of an intertwined basket of crypto asset securities, including securities-based swaps that were designed to mirror U.S. stocks. Most notably, TerraUSD (UST) was marketed as a “yield-bearing” coin, offering to pay interest of up to 20% through Anchor Protocol.
However, UST’s 1-to-1 ratio with the dollar became unstable, leading to its collapse. The SEC alleges that Kwon conspired with a third party to restore the peg, but eventually, UST collapsed in May 2022.
The SEC’s charges against Kwon and Terraform for fraud are a reminder that crypto assets must comply with the same federal securities laws that apply to other investments. The SEC’s enforcement action also serves as a warning to those who might be tempted to manipulate crypto asset markets.
The collapse of TerraUSD and LUNA sent shock waves through the cryptocurrency industry, especially as it was one of the most followed and hyped-up projects in the space. It is unclear what this means for the future of Terra and its investors, but it is clear that this is a wake-up call for those involved in the cryptocurrency industry.
Unfortunately, the price of LUNA grew unstable and forced UST to break its $1 peg, sending Terra and LUNA spiraling. The SEC alleges that Kwon marketed these securities as profit-bearing investments, “repeatedly claiming” the tokens would increase in value.
According to South Korean intelligence, Kwon was recently believed to be in Serbia. He is wanted in South Korea for his involvement in the collapse of TerraUSD. This scandal has sent shockwaves through the crypto markets and has caused many to question the stability of crypto asset securities.
The SEC’s action against Terraform Labs and Do Kwon not only holds them accountable for their roles in Terra’s collapse but also serves as a warning that economic realities must be taken into account when it comes to crypto assets.
