SEC Targets UST Developer Do Kwon For Securities VIolations, Fraud
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SEC Targets UST Developer Do Kwon For Securities VIolations, Fraud

In its second allegation this week that stablecoins are securities, the Securities and Exchange Commission accused Terraform Labs and its CEO of defrauding investors.

SEC Targets UST Developer Do Kwon For Securities VIolations, Fraud

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The developer of the stablecoin whose failure led to dozens of massive crypto bankruptcies that deepened the 2022 crypto winter and helped crush the industry's credibility is now facing an attack by U.S. regulators.

As if Terraform Labs CEO Do Kwon didn't have enough trouble with South Korean authorities trying to track him down in Serbia, the U.S. Securities and Exchange Commission announced on Feb. 16 that it is suing him in connection with the $60 billion collapse in May 2022 of UST and LUNA.

Specifically, the SEC accused Kwon and Terraform Labs of "orchestrating a multibillion-dollar cryptoasset securities fraud involving an algorithmic stablecoin and other cryptoasset securities."

The TerraUSD stablecoin, once the third-largest by market capitalization, collapsed in the space of a week after its arbitrage-based method of maintaining its dollar-peg using the free-floating LUNA token failed. Both ran nearly to zero.

Are Stablecoins Securities?

The SEC complaint alleges that "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."

Both LUNA and UST were "cryptoasset securities" released without the "full, fair, and truthful disclosure" required for securities, SEC chair Gary Gensler said in a statement.

It is the second time in a week the SEC has alleged that stablecoins are securities — the same as it does virtually all other cryptocurrency tokens except for Bitcoin.

The agency has announced its intention to sue Paxos for issuing its Binance USD (BUSD) token as an unregistered security, the firm revealed on Feb 13.

Despite having been ordered by New York regulators to stop issuing BUSD, Paxos said in a statement that it "categorically disagrees with the SEC staff because BUSD is not a security under the federal securities laws." It added:

"We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary."

Allegations of Fraud

Beyond that, the agency is also seeking to hold Terraform and Do Kwon "accountable for their roles in Terra's collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets," said Gurbir Grewal, director of the SEC's Division of Enforcement, in a statement.

Warning that the SEC looks at "the economic realities of an offering, not the labels put on it, Grewal added:

"The Terraform ecosystem was neither decentralized, nor finance. It was simply a fraud propped up by a so-called algorithmic 'stablecoin' — the price of which was controlled by the defendants, not any code."

Gensler said:

"We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors."

The complaint was filed in the U.S. District Court for the Southern District of New York. It alleges violations of both the Securities Act and the Exchange Act.

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