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Inside the SEC’s case against Terra: Key takeaways you need to know

TL;DR

  • The SEC has charged Terra co-founder Do Kwon and Terraform Labs for laundering more than $100 million worth of Bitcoin from the platform following its collapse.
  • The agency accuses Kwon of falsely claiming that the TerraUSD (UST) algorithm helped it regain its one-to-one peg with the U.S. dollar after losing it during a flash crash.
  • The SEC also asserts that Terra never replaced Chai’s payment systems, and Chai payments did not use the Terraform blockchain to process and settle payments.

The United States Securities and Exchange Commission (SEC) has charged Do Kwon and Terraform Labs for laundering more than $100 million worth of Bitcoin from the platform following its collapse in May 2022.

The SEC complaint filed in the U.S. District Court for the Southern District of New York on Feb. 16 revealed that Kwon had transferred over 10,000 Bitcoin from the platform and the Luna Foundation Guard to a cold wallet, then to a Swiss bank account to convert to fiat.

Kwon and his company may have access to over $100 million in cash since withdrawals started in June 2022. Here are the key takeaways from the lawsuit:

Artificially restored TerraUSD’s dollar peg

The SEC complaint also accused Kwon of artificially restoring TerraUSD’s (UST) dollar peg after the stablecoin had been one of the largest by market capitalization at the time the platform collapsed.

The platform solicited a third party to purchase “massive amounts of UST to restore the $1.00 peg,” misleading investors as to its stability and reliability.

According to the complaint, “UST’s price falling below its $1.00 ‘peg’ and not quickly being restored by the algorithm would spell doom for the entire ecosystem, given that UST and LUNA had no reserve of assets or any other backing.”

Tokens were crypto asset securities

The SEC also claimed that several of the tokens involved in the collapse of Terra were “crypto asset securities” falling under its regulatory purview. These tokens included UST, LUNA, and wrapped LUNA, as well as MIR tokens and mAssets developed under Terra’s Mirror Protocol.

The SEC alleged that the company solicited investors for these crypto assets by touting their profit potential, repeatedly stating that the crypto assets would increase in value based on the company’s development, maintenance, and promotion of its blockchain, protocols, and the entire ecosystem.

Partnership with Chai payment app

Terra’s business connections were also a target of the financial regulator, as the SEC reported Chai – a South Korean payment app linked to Terra at the time – “did not process or settle transactions on the Terraform blockchain.”

The defunct company allegedly reported transactions “that had already happened in the real world using Korean Won” while claiming to the public that Chai transacted on the blockchain.

In at least five instances between October 2021 and March 2022, there were one or more days when no transactions whatsoever were confirmed on the Terraform blockchain. Yet, there is no evidence that the Chai payment application was not functioning during those periods.

SEC

Several have also questioned the SEC’s decision to bring charges against Terra and its creator, Do Kwon, just now. Although the SEC has been clamping down on crypto-related firms for months, many are wondering why it took almost a year for the agency to prosecute Kwon and his company.

Others have argued that the SEC is only investigating half of the misconduct, leaving the company and Kwon free to avoid responsibility for the other half.

Disclaimer: The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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Jai Hamid

Jai Hamid is a passionate writer with a keen interest in blockchain technology, the global economy, and literature. She dedicates most of her time to exploring the transformative potential of crypto and the dynamics of worldwide economic trends.

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