US SEC files fraud lawsuit against Terraform Labs and Do Kwon

• The US SEC has charged Do Kwon and Terraform Labs for committing securities fraud
• The SEC has also pressed fraud charges in relation to Chai payments

The United States Securities and Exchanges Commission (SEC) has made yet another move in the stablecoin market. This time around, the regulator is going after the firm behind the collapsed algorithmic stablecoin, TerraUSD (UST). The commission has filed a securities fraud lawsuit against Terraform Labs and its founder – Do Hyeong Kwon.

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A court filing on the lawsuit read,

“From at least April 2018 through May 2022 (“Relevant Period”), Terraform and Kwon offered and sold crypto asset securities in unregistered transactions and perpetrated a fraudulent scheme that led to the loss of at least $40 billion of market value, including devastating losses for U.S. retail and institutional investors.”

Notably, the lawsuit has labeled both LUNA and UST as securities. And, the SEC is going after Terraform Labs and Do Kwon for multiple reasons. The court filings highlighted their role in the promotion of the Anchor Protocol, a yield-bearing protocol that promised a return of 19-20% interest.

The case against Do Kwon and Terraform Labs

Additionally, the regulatory body has alleged that Do Kwon and the firm have “engaged in a fraudulent scheme to mislead investors about Terraform blockchain and its crypto asset securities. Terraform and Kwon repeatedly – and falsely – told the investing public that a popular Korean electronic mobile payment application called “Chai” employed the Terraform blockchain”. The claim set forth was that the blockchain was used for commercial transactions.

However, in reality, the Chai payments never used the blockchain to process transactions. Do Kwon and Terraform Labs “deceptively replicated Chai” transactions in order to make it seem like the blockchain was deployed. In addition, the commission has alleged that the defendants misled investors about the stability of UST, the stablecoin pegged to LUNA.

The infamous de-pegging event, which turned into a death spiral, wiped off more than $60 billion from the market. And, the SEC claimed that this resulted in several US retail investors losing their life savings, while institutional investors took a billion-dollar loss. The lawsuit states,

“The Commission seeks a final judgment: (i) ordering permanent injunctions restraining and enjoining Defendants from again violating the federal securities laws described herein; (ii) ordering Defendants to pay disgorgement with prejudgment interest; (iii) ordering Defendants to pay civil money penalties”