Lawsuit Against Terraform Labs and Kwon Founders
The U.S. Securities and Exchange Commission (SEC) sued Terraform Labs and its founder, Do Kwon, who ran the Terraform ecosystem after it collapsed in 2022, for orchestrating securities fraud.
In a complaint filed in the Southern District of New York, the SEC said that after the collapse of the former Terra (LUNA) ecosystem in May 2022, Terraform Labs and defendant Kwon transferred funds equivalent to 10,000 Bitcoin (BTC) to Switzerland. It also claims that it was sent to a bank account.
First, the SEC said that the defendants would be trading from April 2018 to May 2022, including “mAssets,” designed to mirror the stock prices of U.S. companies to pay returns, and the algorithmic stablecoin TerraUSD (UST). He pointed out that he was offering and selling crypto assets (virtual currency) that are considered unregistered securities.
What is a stablecoin
A cryptocurrency whose price is always stable. Stablecoins are a type of cryptocurrency, and unlike BTC, ETH, and XRP, which have volatility, their purpose is to maintain their value ($1) backed by the US dollar. In addition to US dollar-backed stablecoins (USDT/USDC), there are also stablecoins that use algorithms.
Further, defendants repeatedly advertised to investors that the value of these tokens would increase. For example, the UST was to be paid 20% interest through related protocols.
It also alleges that during the token’s marketing, it misled investors into thinking that the value of the LUNA token would increase by stating that South Korea’s popular mobile payment application Chai would use the Terra blockchain to settle transactions. there is
Specifically, in 2019, Terraform Labs announced a partnership with Chai and explained that it would “rebuild the payment system on the blockchain and simplify the conventional payment system.” However, according to the SEC, Chai did not actually use Terraform’s blockchain for payments.
Collapse of the old Terra Ecosystem
In May of last year, the old UST, an unsecured stablecoin, deviated from the US dollar, and Terra’s ecosystem, including related tokens, collapsed. Many investors have suffered losses.
According to the complaint, by the end of May, more than 5 trillion yen ($40 billion) was lost to the market as cryptocurrencies such as UST and LUNA became worthless.
According to an investigation by the South Korean prosecutor’s office, even within Terraform Labs, there were voices of concern from the beginning about the depegment of UST, an unsecured (algorithmic) stablecoin.
connection: South Korean prosecutors to investigate all Terraform Labs employees over UST drop = report
Bitcoin cash after bankruptcy
The SEC also said Kwon withdrew funds from Terraform Labs and the Luna Foundation Guard (LFG), a former Terra ecosystem non-profit organization, after the Terra ecosystem collapsed in May last year, and placed 10,000 in a Swiss bank account. It claims to have sent Bitcoin (BTC). This is an asset worth ¥33 billion at today’s prices.
The hacker allegedly sent bitcoins to an external wallet and from there to a Swiss financial institution. The SEC alleges that between June 2022 and the time the lawsuit was filed, more than ¥13.4 billion ($100 million) in fiat currency was withdrawn from its bank accounts.
SEC Chairman Gary Gensler explained the points of the complaint:
We allege that defendants, particularly LUNA and UST, have failed to make the full, fair, and truthful disclosures required for cryptocurrencies considered securities.
Further, defendants allege that they repeatedly made false or misleading statements and committed fraud before causing catastrophic losses to investors.
The SEC’s Director of Enforcement, Gurbil Grewal, also criticized the system the defendants operated. “Terra’s ecosystem was neither decentralized nor a legitimate financial platform. It was just a scam and prices were controlled by defendants, not code,” he said.
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