Do Kwon, co-founder and chief executive officer of Terraform Labs, insists he is not on the run from South Korean authorities. Meanwhile, South Korean prosecutors say Interpol issued a “red notice” for Kwon’s arrest. Terraform Labs, the company Kwon founded, is behind the collapsed cryptocurrencies terraUSD and luna, which together were worth $60 billion before the collapse.
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The Securities and Exchange Commission has charged Terraform Labs and its CEO Do Kwon with fraud, alleging they orchestrated a multibillion-dollar “crypto-asset securities fraud,” the SEC said Thursday.
Between April 2018 and the collapse of TerraUSD, also known as UST, and its sister coin luna in May 2022, Kwon and Terraform are alleged to have planned to raise billions of dollars from investors by offering and selling an “interlinked set” of crypto-assets, in including security-based swaps that mirror US stocks, and most famously the so-called “algorithmic stablecoin” TerraUSD. The company advertised UST as a “profitable” coin, offering to pay interest of up to 20 percent, the complaint said.
Like many stablecoins, UST was pegged to the dollar at a ratio of 1 to 1. Waiting for one new UST required a “burn” or destruction of one month. This structure allowed for arbitrage opportunities that were key to maintaining the peg: users could always exchange one luna for UST and vice versa at a guaranteed price of $1, regardless of the market price of any token at the time.
But the price of Luna became volatile and forced UST to break the $1 peg, causing both terra and luna to spiral.
The complaint against Kwon and Terraform was filed in federal court for the Southern District of New York in Manhattan, and both are accused of violating the registration and anti-fraud provisions of the Securities and Exchange Act.
The SEC alleges that Kwon marketed these assets, including the mAsset and Terra swaps, as profit-making securities, “repeatedly asserting” that the value of the tokens would rise.
“Today’s lawsuit not only holds the defendants accountable for their role in the Terra collapse, which devastated retail and institutional investors and sent shockwaves through the crypto markets, but reiterates that we’re looking at the economic realities of the proposition, not putting labels on it,” he said. SEC Director of Enforcement Gurbir Grewal said in a statement.
UST has broken down once before the trading pair finally collapses in 2022. The SEC alleges that Terra fell below $1 in May 2021, and in response, Kwon conspired with an unnamed third party that purchased huge amounts of UST to restore the peg “algorithm.” Publicly, Kwon and Terraform declared it a victory for the algorithm, the SEC claims, and called it a “black swan” event.
Kwon’s current whereabouts are unknown, but according to South Korean intelligence, the Terra co-founder was recently in Serbia. Kwon is wanted in South Korea for his involvement in the TerraUSD collapse.
