The US Securities and Exchange Commission accused crypto entrepreneur Do Kwon and the firm he co-founded of a fraud involving the failed TerraUSD stablecoin.
(Bloomberg) — The US Securities and Exchange Commission accused crypto entrepreneur Do Kwon and the firm he co-founded of a fraud involving the failed TerraUSD stablecoin.
The SEC alleged in federal court on Thursday that Terraform Labs and Kwon offered and sold unregistered securities, including the stablecoin, and carried out a scheme that wiped out at least $40 billion worth of market value. The case marks a significant escalation in the SEC’s crackdown on the crypto industry.
The agency also accused the company and Kwon of misleading investors, including by making false statements about a relationship with a popular South Korean mobile payment app called “Chai” and about the stability of the stablecoin, which was marketed as maintaining a 1-to-1 peg to the US dollar. Terraform and Kwon didn’t immediately respond to requests for comment.
Separately, federal prosecutors in Manhattan are investigating Terraform Labs, people familiar with the criminal probe said. That inquiry also involves looking into the actions of Kwon, they said. And the Commodity Futures Trading Commission has been probing the events surrounding the TerraUSD collapse, according to one of the people familiar. Representatives for the prosecutors’ office and CFTC declined to comment.
TerraUSD, or UST, was supposed to maintain its peg to the dollar through an algorithm and trading in a sister token called Luna. The arrangement failed spectacularly when the stablecoin crashed last May. The token’s implosion kicked off a domino effect that directly, or indirectly, fueled bankruptcies in high-profile companies, including hedge fund Three Arrows Capital, Voyager Digital, and, most prominently, Sam Bankman-Fried’s Alameda Research and FTX.
The SEC lawsuit says last year’s crash wasn’t the first time the stablecoin lost its peg. A year earlier, in May 2021, the value of token dropped below $1. That prompted the company and Kwon to ask a secret third party to intervene and buy large quantities to pump up its value, the agency said. The peg’s restoration, which was touted as a “triumph of decentralization,” led to an influx of investor money, according to the lawsuit.
Meanwhile, the SEC’s case is a significant development in Washington’s mushrooming regulatory crackdown as it demonstrates that the agency is asserting jurisdiction over certain stablecoins, which are a key part of how crypto markets function.
Even before FTX’s collapse, the US government was grappling with how best to regulate stablecoins, which the Treasury Department and other agencies have warned could pose risks to the broader financial system if people begin using them more as a form of payment. A 2021 report called for the token issuers to be regulated like banks and lawmakers have been working on legislation to set guardrails.
Jostling between US agencies over jurisdiction is ongoing and attempts by the SEC to assert more control has generated some criticism. Anxiety over the agency’s efforts is running high after Paxos Trust Co. revealed this week that the agency had told it that was likely to face an enforcement action over its issuance of a stablecoin branded as Binance USD.
Unlike UST, which used algorithms and trader incentives to maintain its price, that Paxos-issued token purports to be fully backed by cash and other liquid assets.
Kwon’s whereabouts are currently unknown. South Korean authorities have been looking for him in connection with a warrant for his arrest that was issued last September on allegations including breaches of capital-markets law. He has denied wrongdoing previously on social media.
“We are continuing efforts to locate Kwon, and it’s difficult to confirm anything related to the investigation at this stage,” the prosecutors’ office in Seoul said in a text message.
–With assistance from Lydia Beyoud, Olga Kharif, Dave Liedtka, Ava Benny-Morrison and Hooyeon Kim.
(Updates with comment from South Korean prosecutors in the final paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.