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The U.S. Securities and Exchange Commission (SEC) is seeking to conclude its legal dispute with Terraform Labs and its co-founder Do Kwon, urging a Manhattan judge to issue a summary judgment in the matter.
According to the agency, the evidence is “clear, undisputed and overwhelming,” indicating that the crypto entrepreneur breached securities regulations during the distribution of the Terra blockchain’s native cryptocurrency, LUNA, and its now-defunct stablecoin TerraUSD (UST).
Allegations of Deception by Do Kwon
In the SEC’s court filing on Friday, it was stated that Kwon and Terraform conspired to “defraud” the public regarding the security of its protocol and tokens, as well as the extent of their actual usage.
For instance, the company inaccurately asserted that Terra had formed a partnership with Chai, a well-known Korean online payment platform, to facilitate merchant transactions, while allegedly executing millions of “fake transactions” to create the illusion of a more active network.
Kwon also misled investors about the inherent stability of UST in May 2021, asserting that its peg to the dollar “automatically self-healed” due to the cleverness of its design and its connection with LUNA.
Although the algorithmic “stablecoin” managed to recover from a temporary de-peg at that time, the SEC contends that this recovery was not a result of Terra’s design.
“Defendants had struck a secret side deal with a third party to push UST back up to $1, in exchange for selling that party LUNA at dramatically reduced prices,” the SEC asserted.
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UST ultimately collapsed a year later, when a significant de-pegging event proved insurmountable for the protocol, leading LUNA into a hyperinflationary downward spiral.
The Luna Foundation Guard liquidated over 80,000 BTC during this period in an unsuccessful attempt to maintain the peg, which ultimately contributed to a downturn in the crypto market and triggered a series of cascading crypto failures throughout the year.
Violation of Securities Law
The SEC also noted that the defendants sold LUNA and MIR to investors via public markets without prior registration of their sales with the agency.
The SEC raised concerns regarding how LUNA and the company’s other “crypto asset securities” were presented to investors. Purchasers were promised a share of transaction fees generated by the Terra blockchain, along with an increase in LUNA’s value as network adoption grew.
“Defendants pitched LUNA as an investment that would increase in value based upon Defendants’ efforts to increase usage of the Terra blockchain,” the SEC stated.
As the agency has often pointed out in similar cases, a key aspect of the Howey Test – a legal standard for identifying investment contracts – requires that they must guarantee profits based on the efforts of others.
In July, the SEC was unsuccessful in its legal attempt to classify XRP as a similar security.
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