By Michael Scott
The US Securities and Exchange Commission (SEC) update conveyed on Thursday, February 16, confirmed Terraform Labs alongside its co-founder Do Kwon. The investment and securities watchdog alleges that Terraform and its co-founder misled investors on several issues.
Misleading Statements on TerraUSD Stablecoin Stability
SEC alleges that Do Kwon and Terraform misled the investors on the stability of TerraUSD stablecoin. The defendants are accused of dishonesty on UST stability by assuring investors that the algorithm would quickly restore the peg to an equivalent US dollar.
The suit cited absence of the algorithm to restore the peg spelled doom as Terraform ecosystem was running UST and LUNA without reserves or actual assets backing.
Non Disclosure of Party Settling Payments
The complaint lodged by SEC indicates that Kwon and Terraform failed to disclose the party utilizing TerraUSD for settling payments. The suit identifies the LUNA token and the yield-bearing Anchor Protocol as crypto asset securities. The reference provides a basis for suing Kwon and Terraform for perpetrating fraud. The charges relate to the defendants selling unregistered securities and derivative swaps.
Failure to exercise transparency misled the investors, only for them to lose millions of digital wealth as TerraUSD collapsed. Their actions triggered the inevitable TerraUSD collapse with the resulting wave of bankruptcies witnessed across the crypto sector.
Secrecy in Trading Firm to Re-Pegging TerraUSD Stablecoin
News of the SEC suing Terraform surfaced on Thursday, February 16, in a Bloomberg report. The article cited SEC’s submission in the court documents indicating that Kwon and Terraform collaborated with an anonymous US Trading firm. SEC alleges that Kwon tasked the US firm with restoring UST’s peg after the 10 cents decline in May 2021. The filings indicated that the US firm would earn LUNA tokens for every purchase of UST tokens.
SEC accuses Terraform and Kwon of conveying misleading statements that disguised the mechanism utilized in restoring the UST-Dollar peg. In particular, Kwon and Terraform credited the UST’s recovery in May to an underlying algorithm.
Terraform, and Kwon misled investors by omitting the mechanism responsible for the UST re-pegging. The complaint illustrated that the accused omitted details indicating that the trading firm deliberately intervened to restore the peg.
Dishonesty and Misstatement Plunged Crypto Industry into Chaos
The complaints indicated that Terraform Labs and Kwon’s dishonesty and material misstatement cost innocent investors billions of dollars as the wave of bankruptcies sent shockwaves across the crypto industry.
A subsequent press release organized by SEC head of enforcement Gurbir Grewal ruled out that Terraform ran a decentralized finance project. Instead, the SEC executive considers the Terraform Labs and Kwon project a fraud with the idea sold to investors as algorithmic ‘stablecoin.’
Grewal regretted that investors were duped into believing in the defendants’ fraudulent manipulation and control of price and not by the code as alleged.
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