As a result of TerraUSD’s collapse last year, the crypto industry experienced a wave of bankruptcies.
Terraform Labs, the company behind the failed TerraUSD stablecoin, and its co-founder Do Kwon have been sued by the U.S. Securities and Exchange Commission (SEC).
A complaint filed by the SEC alleges Terraform and Kwon misled investors about a number of issues, including who was using TerraUSD for payments, and called both the Anchor Protocol and the LUNA tokens “crypto asset securities.” As part of the SEC’s investigation, Terraform and Kwon were accused of fraud, selling unregistered securities, and selling security-based swaps, among other charges.
Also, Terraform and Kwon misled investors about one of Terraform’s most important offerings – the stability of UST, the algorithmic ‘stablecoin’ purportedly pegged to the dollar, according to the lawsuit. “UST’s price dropping below its $1.00 ‘peg’ and not being quickly restored by the algorithm would spell doom for the entire Terraform ecosystem, since neither UST nor LUNA have reserves of assets or any other backing.”
On Thursday, Bloomberg reported that Terraform would be sued by the SEC.
Kwon and Terraform allegedly worked with a U.S. trading firm, which was not named, to restore UST’s peg after it fell nearly 10 cents in May 2021. The trading firm bought UST tokens and Terraform provided LUNA tokens.
When UST recovered in May 2021, Terraform and Kwon made materially misleading statements about how its dollar peg was restored almost immediately. Specifically, Terraform and Kwon emphasized the purported efficiency of the algorithm underlying UST in maintaining UST pegged to the dollar – misleadingly omitting the true cause of UST’s re-peg: deliberate intervention by the U.S. Trading Firm.
A wave of bankruptcies in the crypto industry followed the collapse of TerraUSD last year.
Bloomberg reported that Terraform Labs has not been contacted by the SEC about the action, while the SEC declined to comment.
Gurbir Grewal, SEC Director of Enforcement, said the project was neither decentralized nor financial.
According to him, it was simply a fraud propped up by a so-called algorithmic ‘stablecoin’ whose price was manipulated by the defendants.