Explained: SEC allegations against Do Kwon and Terraform Labs

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The Securities and Exchange Commission (SEC) has filed a lawsuit against Terraform Labs and Do Kwon alleging that they defrauded investors in a scheme involving multiple unregistered securities.

The SEC highlights claims by Terraform Labs and Do Kwon that Chai, a Korean payments application, used Terra. This was despite the payments actually being mirrored onto the blockchain and made using conventional means.

It also described how Kwon and Terraform Labs outlined the various benefits that Chai was deriving from using Terra. These included faster processing times and lower fees, despite the fact that Terra was not actually being used to process the payments.

At one point Kwon challenged his followers to analyze the Terra blockchain to identify which addresses may be Chai merchants, and would later recognize one Twitter user for successfully doing that, despite the fact that Terraform Labs allegedly controlled those addresses.

Read more: Here’s a complete timeline of Do Kwon’s $29B DeFi ecosystem, Terra

The SEC also claimed that, despite Kwon’s claim that the May 2021 restoration of the peg was a result of the Terra algorithm, the company was actually entering into an agreement with a third party to purchase large quantities of UST in an attempt to restore the peg. This unnamed third party was able to receive Luna at a price of $0.40 per token despite the fact that it traded for over $90 during this period.

The SEC also points toward Kwon and Terraform Labs’ efforts to create, advertise, and maintain the unsustainable lending protocol Anchor. Specifically, it draws attention to July 2021 when Terraform Labs provided $70 million for the Anchor yield reserve, and $450 million in early 2022 from the Luna Foundation Guard, at the request of Kwon.

The lawsuit claims that Terraform Labs offered five securities. These were Luna, Wrapped Luna, TerraDollars (UST), Mirror (MIR) tokens. These MIR tokens were issued on the Mirror token pegged to other securities.

The SEC also describes a series of ‘loans’ of Luna to a US-based trading firm that subsequently sold it on a US-based cryptocurrency exchange. The SEC alleges that this series of transactions was, “in essence, public distributions of Luna by Terraform.”

Terraform Labs also directly sold billions of dollars worth of Luna into the secondary market, including on platforms where US persons were permitted to trade.

Similar patterns are described for MIR, with agreements made with US purchasers for the initial sale, ‘loans’ to market makers who sell them to US investors, and a listing agreement with a US-based exchange.

Do Kwon is currently on the run and is thought to be lying low in Serbia. An arrest warrant was issued for Kwon in September last year and earlier this month, South Korean officials traveled to the Balkan state to seek help in tracking him down. However, despite this and an Interpol red notice, he has so far managed to evade capture.

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