The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against Terraform Labs and its co-founder, Do Kwon, for allegedly deceiving investors. The complaint accuses the company of misleading investors about various aspects, including the usage of its stablecoin, TerraUSD, for payments.
The SEC claims that Terraform and Kwon committed fraud, sold unregistered securities, and sold unregistered security-based swaps, among other related charges. The complaint also alleges that the Terra ecosystem was not decentralized nor financial, but simply a fraud bolstered by a so-called algorithmic stablecoin.
Tightening Regulations: SEC Takes Action Against Terraform Labs
In addition, the SEC alleges that Kwon and Terraform worked with an unnamed trading firm to restore the UST’s peg after it fell nearly 10 cents in May 2021. After the trading firm bought large amounts of the UST token, it received LUNA tokens from Terraform.
According to the SEC Chair Gary Gensler, the SEC alleges that Terraform and Kwon failed to provide the public with full, fair, and truthful disclosure, as required for various crypto asset securities, most notably for LUNA and Terra USD. The SEC’s action against Terraform highlights the need to scrutinize the economic realities of an offering, rather than the labels put on it.
No Contact from SEC, Arrest Warrant Issued for Do Kwon
Terraform Labs claims that it has not been contacted by the SEC about the action, according to a statement to Bloomberg. Meanwhile, an arrest warrant has been issued for Do Kwon in his home country, South Korea. According to South Korean police reports, Kwon’s last known location was Serbia.
Consequences of Terra USD Collapse
The collapse of TerraUSD last year triggered a wave of bankruptcies in the crypto industry. Five other crypto firms, including Celsius, Voyager, FTX, BlockFi, and Genesis, have since filed for bankruptcy.
The collapse of the Terra ecosystem hastened the default of crypto hedge fund Three Arrows Capital in June, spreading financial contagion between high-risk centralized lending and borrowing crypto firms. Kwon, who is known for his outrageous Twitter comments, is one of crypto’s most notorious public figures from the recent bull run.
What does It mean for the Crypto World?
The SEC’s charges could have a chilling effect on the development of algorithmic stablecoins and other complex financial instruments in the crypto space, as regulators will be closely scrutinizing such offerings for compliance with securities laws.
Overall, this news emphasizes the need for greater transparency and investor protection in the crypto market, as regulators seek to prevent fraud and other abuses that can harm investors and destabilize financial markets.
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