After 10 months! SEC sues Do Kwon for alleged cryptocurrency securities fraud

In May last year, the Terra ecosystem suffered significant losses due to the death spiral of UST and LUNA, causing substantial losses to many investors. Now, almost 10 months later, the SEC has officially filed a lawsuit against Terraform Labs and Do Kwon, alleging involvement in unregistered securities and cryptocurrency asset fraud.

SEC Files Lawsuit Against Terra Empire Collapse

According to the SEC's press release, it announced charges against Terraform Labs, based in Singapore, and founder Do Kwon, hereinafter referred to as defendants, for orchestrating a cryptocurrency securities fraud involving algorithmic stablecoins and other crypto assets.

The documents allege that from April 2018 to May 2022, the Terra ecosystem collapsed, with the defendants raising billions of dollars from investors through the sale of a series of related crypto asset securities, many of which were conducted in unregistered transactions. These crypto asset securities included:

1. mAssets: Security-based exchange-traded swaps intended to pay returns by tracking the price of U.S. company stocks, originating from the Mirror protocol.
2. MIR: Governance token of the Mirror protocol.
3. Terra USD UST: A crypto asset security known as an "algorithmic stablecoin" exchangeable through algorithms with LUNA, pegged to the U.S. dollar.
4. LUNA: Reserve and governance token of the Terra ecosystem used to peg with UST and pay gas fees for on-chain transactions.

The SEC alleges that the defendants marketed crypto asset securities to profit-seeking investors, repeatedly claiming that these tokens would appreciate. For example, describing UST as an interest-bearing stablecoin that could earn 20% interest through the Anchor protocol, or misleading investors into believing that a South Korean mobile payment app would settle transactions using the Terra blockchain, thereby boosting the price of LUNA.

Regarding the above events, SEC Chairman Gary Gensler stated:

"We allege that Terraform and Do Kwon failed to provide the public with full, fair, and honest disclosures as required for crypto asset securities, particularly LUNA and Terra USD. We also allege that they continually built investor confidence through misstatements and misleading statements before causing catastrophic harm to investors to perpetrate fraud."

As a result, the SEC has filed a lawsuit against the defendants in the Southern District of New York, alleging violations of registration and anti-fraud provisions of the Securities Act and Exchange Act.