The US Securities and Exchange Commission has sued the collapsed stablecoin operator Terraform Labs and its chief executive, Do Kwon, for allegedly arranging a cryptocurrency fraud that led to billions of dollars in losses.
The SEC complaint filed on Thursday said that between April 2018 and May 2022, Singapore-based Terraform and Kwon raised billions of dollars from investors by selling a number of interlinked digital securities, many of which were not properly registered with regulators.
These assets included TerraUSD, a stablecoin developed by Kwon whose sudden multibillion-dollar collapse last year sent shockwaves throughout the crypto world, as well as the associated luna token, the SEC said.
That marked the start of an unprecedented year of turbulence for the industry, with several once-prominent firms collapsing in just a few short months, capped off by the failure of exchange platform FTX in November.
The SEC said Terraform and Kwon used misleading statements to market their digital assets, such as telling investors that a well-known South Korean mobile payment app used the Terra blockchain to settle transactions that would add value to the luna token.
The SEC alleged that many investors involved in Terraform’s tokens — including a painter in Vermont as well as a musician and a pharmacist in California — “lacked significant investment experience” and acquired information on the assets online, according to the complaint. In total, the fraud caused a $40bn loss in market value, the SEC said.
“This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws, but it also demonstrates the strength and commitment of the SEC’s dedicated public servants,” said Gary Gensler, SEC chair, in a statement, adding that the defendants in the case “attempted to prevent us from obtaining important information about their business”.
The SEC complaint cites a Terraform employee, who in a chat to a colleague in 2021 said that “working at terra has reinforced my belief in conspiracy theories . . . just the white lies . . . and the illusion of decentralisation . . . all from the armchair of a single man sipping whisky”, allegedly in reference to Kwon.
The regulator alleged Terraform and Kwon violated registration and anti-fraud provisions in US securities laws. Lawyers for Terraform and Kwon did not immediately respond to requests for comment.
The 31-year-old Kwon resided in South Korea and Singapore at the time of the alleged fraud, but his current address remains unknown, according to the SEC complaint. A South Korean court has issued a warrant for his arrest, the SEC said, citing media reports.
The regulator claimed that the defendants transferred more than 10,000 bitcoin from Terraform and other accounts to a wallet that is not hosted on any exchange. Since May 2022, they have been periodically transferring bitcoin from the wallet to a Swiss bank, and have then converted it into cash, according to the complaint. More than $100mn in cash had been withdrawn from the bank since June 2022, the SEC said.
The agency’s move is the latest blow to Terraform and its South Korean chief executive, which have faced numerous legal challenges after the breakdown of TerraUSD and luna caused significant losses for investors.
“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 shockwaves through the crypto markets, but once again highlights that we look to the economic realities of an offering, not the labels put on it,” Gurbir Grewal, director of the SEC’s enforcement division, said in a statement.
The case against Terraform and Kwon is the latest in a number of SEC enforcement actions against cryptocurrency platforms as US regulators broaden a crackdown on digital assets that has sparked fears from those in the sector that crypto could be pushed out of one of its biggest markets.
Additional reporting by Scott Chipolina
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