TerraUSD inventor and co-founder Do Kwon is being sued by the SEC for fraud
The US Securities and Exchange Commission is suing the company behind TerraUSD, a crypto stablecoin whose collapse last year sparked an industry-wide crisis and a cascade of high-profile bankruptcies.
The SEC alleged Thursday in federal court that Terraform Labs, the company behind the token, and its co-founder Do Kwon offered and sold unregistered securities and conducted a fraudulent scheme that wiped out at least $40 billion in market value, including heavy losses for both retail and institutional investors.
The agency accused the company and Kwon of misleading investors, including regarding the stability of the stablecoin TerraUSD, which was marketed as a 1:1 peg to the US dollar.
“Terraform Labs has not been contacted by the SEC regarding any such proceeding and therefore cannot comment,” the company said in a statement to Bloomberg when asked before the SEC filed the lawsuit.
TerraUSD, or UST, was supposed to maintain its peg through an algorithm and trading a sister token called Luna — an experiment that failed spectacularly when the stablecoin crashed last May, sparking a massive selloff. The token implosion triggered a domino effect in the crypto markets. It has directly or indirectly led to the bankruptcies of high profile companies including hedge fund Three Arrows Capital, Voyager Digital and most notably Sam Bankman-Fried’s Alameda Research and FTX.
Meanwhile, the SEC case is a significant development in Washington’s rampant regulatory crackdown, as Wall Street’s main regulator would effectively assert its jurisdiction over certain stablecoins, which are an integral part of how crypto markets work.
Even before FTX collapsed, the US government was grappling with how best to regulate stablecoins, as the Treasury Department and other agencies have warned they could pose risks to the broader financial system if people start trading them more than to use means of payment. A 2021 report called for token issuers to be regulated the way banks and lawmakers have been working on legislation to set guard rails.
Wrangling between US agencies over jurisdiction continues, and attempts by the SEC to assert more oversight have drawn some criticism. Concerns about the agency’s efforts are high after Paxos Trust Co. announced this week that the agency had told it it was likely to face an enforcement action over the issuance of a Binance USD-branded stablecoin.
Unlike UST, which used algorithms and trader incentives to maintain its price, this token issued by Paxos purports to be fully backed by cash and other liquid assets.
Under securities law, a virtual currency can fall under SEC jurisdiction if Americans buy it to fund a company or project with the expectation of benefiting from the efforts of those involved in it. This finding is based on a 1946 US Supreme Court decision defining investment contracts.
The SEC is increasing pressure on co-founder Kwon, who famously received an SEC subpoena on another matter while attending an industry conference in New York in 2021.
Kwon’s whereabouts are currently unknown. South Korean authorities are looking for him in connection with an arrest warrant issued for him last September for alleged violations of capital markets laws. He has previously denied wrongdoing on social media.
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