Terraform Labs, the company behind the Terra blockchain, and its co-founder, Do Kwon, are being sued by the Securities and Exchange Commission (SEC) for allegedly defrauding investors. The complaint alleges that the company made false claims about TerraUSD payments and other matters, leading investors to believe that Terra was a legitimate decentralized financial project. However, the SEC has accused Terraform and Kwon of fraud, selling unregistered securities and security-based swaps, and other offences.
If you’ve missed out on what went down in 2022 and how the crypto industry was brought to it’s knees- we’ve got you. Read on to know how the scam unfolded.
The Collapse Of TerraUSD (UST) and The Impact On The Crypto Industry
TerraUSD (UST) is a stablecoin created by Terraform Labs, pegged to the value of the US dollar and used for various purposes on the Terra blockchain. It reached a market capitalization of $17 billion by April 2022.
However, in May 2022, TerraUSD lost its dollar peg, causing a $40 billion loss in value, leading to the shutdown of the Terra network. Terraform Labs, the company behind the stablecoin, is now facing a lawsuit from the SEC for allegedly selling unregistered securities and violating investor protection laws.
The Mastermind of Market Manipulation
The SEC has accused Terraform Labs of making false claims about its partnership with payments app Chai, founded by Daniel Shin. In 2019, Terra announced that it would rebuild Chai’s payments system on the blockchain to simplify transactions and provide lower fees to merchants.
The SEC alleges that Chai payments did not use the Terra blockchain as promised and that Terra deceptively replicated Chai payments on its blockchain to make it appear as though they were occurring on Terra. Members of the industry have said that Chai’s use of Terra was a fabrication, with fake on-chain transactions, and that people at Terraform Labs knew it was fraudulent.
In addition, the SEC alleges that Kwon and Terraform worked with Jump 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. The Jump Trading firm walked away with a profit of $1.2 billion in this scheme.
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.
Do Kwon and Daniel Shin: A Lack Of Accountability
The SEC has accused Do Kwon, of making false claims about Terra and transferring 10,000 Bitcoin worth almost $250 million to a Swiss bank account. The Commission alleges that Kwon has been converting the BTC to cash, with over $100 million withdrawn from the Swiss bank between June 2022 and the filing of the lawsuit.
Following the collapse of Terra in May, South Korean authorities raided the home of Daniel Shin in Seoul. In December, Shin was brought before a court hearing to determine whether he should be arrested for allegedly extracting illegal profits from Terra before its downfall. The prosecution accused him of selling $105 million worth of LUNA tokens.
Investor stories and lessons learned
The SEC lawsuit highlights the stories of individual investors, such as a pharmacist in California who borrowed $400,000 against their home to purchase TerraUSD (UST) and a painter in Vermont who invested $20,000 that was meant for his son’s college tuition. These individuals, like many others, put their life savings on the Terra network, only to lose a significant amount of it when UST lost its dollar peg. It is a sad reality that many investors suffered financial losses as a result of greedy market manipulation.
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.
Rising From The Ashes
The Terraform Labs and Do Kwon scandal shows that investors should be careful when investing in cryptocurrency. You should research the projects and people behind them well before investing and not put all your money in one asset. Many people lost all their savings due to the TerraUSD collapse, so it’s important to spread out your investments and manage risks.
Investors need to be careful and not believe promises of high returns without investigating the technology, business model, and regulations of any crypto asset before investing.