Terraform Labs, Do Kwon Face Legal Reckoning for Investor Deception, Crypto Collapse

Terraform Labs and its founder Do Kwon will face trial in Manhattan on Monday, accused by the SEC of misleading investors about the stability of TerraUSD and Luna. The collapse of these cryptocurrencies in 2022 roiled markets, causing investors to lose over $40 billion and leading to wider havoc in the crypto space. The SEC alleges that Kwon and Terraform engaged in fraudulent practices to prop up TerraUSD's value and falsely claimed its blockchain was used by a popular Korean payment app. While Kwon denies wrongdoing, the SEC seeks civil penalties and industry bars.

Terraform Labs and Do Kwon Face Legal Scrutiny for Misleading Investors and Cryptocurrency Collapse

New York, USA - Terraform Labs and its founder, Do Kwon, will undergo trial in the Manhattan courtroom on Monday, facing allegations from regulatory authorities that they engaged in deceptive practices towards investors prior to the catastrophic collapse of two of the company's cryptocurrencies, which sent shockwaves throughout the financial markets in 2022.

The United States Securities and Exchange Commission (SEC) has charged Kwon and the Singapore-based blockchain company with misleading investors throughout 2021 regarding the stability of TerraUSD, a stablecoin designed to maintain a value of $1. The regulatory body further alleges that Terraform falsely claimed its blockchain technology was employed by a prominent South Korean mobile payment application.

Do Kwon, the CEO of Terraform Labs, will not be physically present at the trial. Apprehended in Montenegro last March, he remains in custody awaiting extradition proceedings to his native South Korea, where he faces additional criminal charges. The extradition process has recently been delayed by a Montenegro court following concerns raised by the local prosecutor's office.

In addition to the charges brought forth by the SEC, federal prosecutors in New York have also accused Kwon of fraudulent activity and are pursuing his extradition to the United States.

Kwon's technological brainchild, TerraUSD, was conceived as a stablecoin, while Luna, another token created by Terraform, exhibited greater price volatility and was closely intertwined with TerraUSD.

The SEC estimates that investors suffered losses exceeding $40 billion collectively as a result of the collapse of these two tokens, which occurred in May 2022 when TerraUSD's peg to the US dollar became unsustainable.

The ensuing financial turmoil extended beyond these specific cryptocurrencies, adversely affecting the value of other digital assets, including Bitcoin, and disrupting the broader cryptocurrency market, ultimately leading to the bankruptcy of several companies in 2022.

The SEC alleges that Terraform and Kwon secretly employed a third party to acquire substantial amounts of TerraUSD, thereby artificially inflating its price when the stablecoin strayed from its peg in May 2021. The regulatory body contends that Kwon subsequently attributed this price recovery to the purported reliability of TerraUSD's algorithms.

Furthermore, the SEC asserts that Terraform and Kwon falsely promoted their blockchain technology as being the foundation for transaction processing and settlement between merchants and customers on the Chai payment app.

Terraform Labs and Kwon have vigorously contested these accusations, maintaining that the SEC has taken statements made by Kwon and other Terraform employees out of context.

The SEC is seeking civil penalties and injunctions prohibiting Kwon and Terraform from participating in the securities industry.

In December, U.S. District Judge Jed Rakoff partially granted the SEC's request, ruling that Terraform Labs had unlawfully sold digital assets without the necessary registration as securities. However, the judge dismissed the SEC's allegations that Terraform and Kwon had illegally offered security-based swaps through a feature that allowed users to create digital assets mirroring the price of other assets, such as stocks or cryptocurrencies.

The judge has yet to determine the extent of damages that Terraform must pay. The company filed for bankruptcy protection in January, acknowledging that any potential penalty could exceed its available assets.