Feb. 16 (UPI) — The Securities and Exchange Commission on Thursday announced that it had filed a lawsuit against Do Kwon, the creator of the blockchain protocol Terra.
Kwon is alleged to have orchestrated a $40 billion securities fraud scheme that caused “devastating losses for U.S. retail and institutional investors,” the SEC said in a complaint filed with a U.S. federal court in Manhattan.
The SEC said that Kwon and his company, Terraform, offered and sold crypto asset securities in “unregistered transactions” that were billed as “profit-seeking investments” with promised returns of up to 20% interest.
“[His] efforts at attracting investors and growing the size and value of the Terraform ‘ecosystem’ were initially successful,” the SEC said in the complaint.
“By April 2022, one of Terraform’s crypto asset securities, the LUNA token, had a market value among the 10 highest in the world for crypto assets.”
The lawsuit stems from the collapse of TerraUSD, a sister cryptocurrency to LUNA sold by the company as having a 1-to-1 ratio with the dollar. The SEC accused Kwon of misleading investors on the stability of TerraUSD, which is also known as UST.
“In May 2022, UST depegged from the U.S. dollar, and the price of it and its sister tokens plummeted to close to zero,” the SEC said in a news release Thursday.
Kwon was also accused in the complaint of having “repeatedly” and “falsely” told investors that a popular electronic mobile payment application in South Korea, called Chai, used the Terraform blockchain to process transactions between consumers and merchants.
“In reality, Chai payments did not use the blockchain to process and settle payments,” the lawsuit reads.
“Defendants deceptively replicated Chai payments onto the Terraform blockchain in order to make it appear that they were occurring on the Terraform blockchain, when, in fact, Chai payments were made through traditional means.”
Officials in South Korea issued a warrant for Kwon’s arrest in September, Bloomberg News reported, while Kwon tweeted that he was “not ‘on the run’ or anything similar.”
SEC officials noted in the complaint that Kwon’s whereabouts are currently unknown and that South Korean police even traveled to Serbia earlier this month in a bid to find him.
“Today’s action not only holds the defendants accountable for their roles in Terra’s collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets, but once again highlights that we look to the economic realities of an offering, not the labels put on it,” said Gurbir Grewal, director of the SEC’s Division of Enforcement.
“As alleged in our complaint, the Terraform ecosystem was neither decentralized, nor finance. It was simply a fraud propped up by a so-called algorithmic ‘stablecoin’ — the price of which was controlled by the defendants, not any code.”