SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes
Posted on 02/19/2023
A stablecoin is a cryptocurrency which attempts to maintain a more stable price, usually by pegging its value to an underlying asset like gold, or in this case, U.S. dollars. On February 16, 2023, the Securities and Exchange Commission (SEC) charged Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon (Do Kwon) with orchestrating a multi-billion-dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.
According to the SEC’s complaint, from April 2018 until the scheme’s collapse in May 2022, Terraform and Kwon raised billions of dollars from investors by offering and selling an inter-connected suite of crypto asset securities, many in unregistered transactions. These included “mAssets,” security-based swaps designed to pay returns by mirroring the price of stocks of US companies, and Terra USD (UST), a crypto asset security referred to as an “algorithmic stablecoin” that supposedly maintained its peg to the U.S. dollar by being interchangeable for another of the defendants’ crypto asset securities, LUNA. The complaint further alleges that Terraform and Kwon offered and sold investors other means to invest in their crypto empire, including the crypto asset security tokens MIR—or “mirror” tokens—and LUNA itself.
The SEC’s complaint alleges that Terraform and Kwon marketed crypto asset securities to investors seeking to earn a profit, repeatedly claiming that the tokens would increase in value. For example, they touted and marketed UST (also known as TerraUSD) as a “yield-bearing” stablecoin, which they advertised as paying as much as 20 percent interest through the Anchor Protocol. The SEC’s complaint also alleges that, while marketing the LUNA token, Terraform and Kwon repeatedly misled and deceived investors that a popular Korean mobile payment application used the Terra blockchain to settle transactions that would accrue value to LUNA. 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. Meanwhile, Terraform and Kwon also allegedly misled investors about the stability of UST. In May 2022, UST depegged from the U.S. dollar, and the price of it and its sister tokens plummeted to close to zero.
“We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD,” said SEC Chair Gary Gensler in a press release. “We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
The complaint, filed in the U.S. District Court for the Southern District of New York, charges the defendants with violating the registration and anti-fraud provisions of the Securities Act and the Exchange Act. In addition, Do Kwon is wanted in South Korea for his involvement in the collapse of TerraUSD.
Paxos
Before this SEC charge on Do Kwon, the New York State Department of Financial Services issued the order “as a result of several unresolved issues related to Paxos’ oversight of its relationship with Binance.”
The New York State Department of Financial Services ordered Paxos to cease minting new Binance USD (BUSD) tokens. The Ethereum-built BUSD tokens are backed by some $16 billion worth of Treasuries and Treasury Reverse Repurchase Agreements. Paxos did confirm it had been notified by the SEC of potential charges in connection with its BUSD product. The SEC has defined the BUSD as a security in a Wells Notice sent to its issuer, Paxos Trust Company. Paxos believes BUSD is not a security under U.S. federal securities laws.
“Effective February 21, Paxos will cease issuance of new BUSD tokens as directed by and working in close coordination with the New York Department of Financial Services,” Paxos said in a statement, adding that it would “end its relationship with Binance for the branded stablecoin BUSD.”
