SEC Sues Terraform Labs, Do Kwon for Misleading Investors on TerraUSD Stablecoin

The U.S. Securities and Exchange Commission (SEC) sued Terraform Labs, the company behind the failed TerraUSD stablecoin, and its co-founder Do Kwon on Thursday.

The SEC alleged that Terraform and Kwon misled investors on a number of issues, including who was using TerraUSD for payments, and called both the yield-bearing Anchor Protocol and the LUNA token "crypto asset securities," according to the complaint. The SEC is charging Terraform and Kwon with fraud, selling unregistered securities, selling unregistered security-based swaps and other related claims.

"Terraform and Kwon also misled investors about one of the most important aspects of Terraform's offering – the stability of UST, the algorithmic 'stablecoin' purportedly pegged to the U.S. dollar," the suit said. "UST's price falling below its $1.00 'peg' and not quickly being restored by the algorithm would spell doom for the entire Terraform ecosystem, given that UST and LUNA had no reserve of assets or any other backing."

Bloomberg first reported the SEC would sue Terraform earlier on Thursday.

The complaint alleged that Kwon and Terraform worked with a U.S. trading firm, which was not named, to restore UST's peg after it fell nearly 10 cents in May 2021. After the trading firm bought amounts of the UST token, it received LUNA tokens from Terraform.

"Almost immediately upon UST’s recovery in May 2021, Terraform and Kwon began to make materially misleading statements about how UST’s peg to the dollar was restored. Specifically, Terraform and Kwon emphasized the purported effectiveness of the algorithm underlying UST in maintaining UST pegged to the dollar – misleadingly omitting the true cause of UST’s re-peg: the deliberate intervention by the U.S. Trading Firm to restore the peg," the complaint said.

The collapse of TerraUSD last year led to a wave of bankruptcies in the crypto industry.

Terraform Labs told Bloomberg it has not been contacted by the SEC about the action, while SEC declined to comment to Bloomberg.

In a press release, SEC Director of Enforcement Gurbir Grewal said the project "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," he said.

UPDATE (Feb. 16, 2023, 22:10 UTC): Adds additional detail.