Investors who believed the narrative that TerraUSD’s purported founder Do Hyeong Kwon and his company Terraform Labs had discovered a revolutionary technique to construct a permanent money engine lost more than $40 billion of market value as a result of the collapse of TerraUSD last May.
The U.S. Securities and Exchange Commission’s charge sheet submitted in court yesterday was the first thorough examination of what went wrong. The claims depicted an image that was significantly different from the one that 31-year-old Kwon and his partners presented to investors and the international media.
The main conclusions are broken down as follows:
Investors were mislead by Terraform and Kwon over the reliability of TerraUSD (also known as UST). The cryptocurrency was promoted as an algorithmic stablecoin with a 1:1 tie to the US dollar through the application of complex arithmetic.
In May 2021, the token fell off its peg, causing people to worry. The SEC warned that if the peg had not been promptly repaired, it “would spell catastrophe for the whole Terraform ecosystem.”
won “covertly” sought assistance from a third party, known as Jump Trading by The Block but not included in the charge sheet. Jump bought “huge amounts” of UST to get the peg back. Publicly, that endeavor was heralded as a success of UST’s decentralization and built-in self-healing features, and investors continued to spend billions of dollars into the venture. According to the SEC filing, Jump eventually made nearly $1.3 billion from its partnership with Terraform.
Kwon and his colleagues claimed that a Korean payments business by the name of Chai was utilizing the Terraform blockchain to settle millions of transactions in order to generate enthusiasm about its potential. The SEC claimed that was a total fiction.
Daniel Shin Hyun-seung, who also established Terraform, formed Chai Corporation. Kwon was a member of the Chai board, and the two companies shared personnel and office space. The investigation against Chai and Shin is being carried out by Korean authorities, according to a representative for Chai who was reported by Forkast News in November, “Daniel will thoroughly cooperate with the ongoing inquiry to clear the ambiguities and to address such rumors.”
According to the SEC, Terraform and Kwon misrepresented Chai’s role throughout investor solicitation activities and in Kwon’s open interviews. This includes a slide deck presentation to a U.S. institutional investor praising Chai’s use of the Terraform blockchain and highlighting its speed and effectiveness.
The SEC wrote that Kwon’s team programmed a server to receive and process data about Chai real-world transactions with Korean merchants, then issue instructions to the Terraform blockchain to replicate those transactions as if they had been done on that blockchain in order to fool people looking at the Terraform blockchain for evidence of the Chai transactions.
The watchdog also claims that UST and other tokens connected to Terraform were unregistered securities. These included mirror tokens made to mimic the price fluctuations of listed stocks as well as so-called wrapped tokens, which are formed while traveling between blockchains.
The SEC claimed that Terraform violated American securities laws by failing to register these distinct products.
The agency stated that five assets, including LUNA tokens, “wrapped” LUNA, UST, MIR tokens, and security-based swaps or mAssets, were “crypto asset securities.” The SEC reviewed over the assets in the complaint and compared them to various aspects of the Howey Test, which was established in a 1946 case involving Florida orange fields and the U.S. Supreme Court. The SEC has frequently applied that approach to decide whether cryptocurrencies are securities or not.
Given how sensitive the cryptocurrency sector is to any SEC assertion that tokens are securities, this lawsuit may end up being the most keenly followed aspect of any trial. Industry groups have intervened in other cryptocurrency cases brought by the SEC, including the insider trading lawsuit against former Coinbase manager Ishan Wahi, to claim that the SEC lacks power since tokens are not securities.
Investigators claim that Kwon is hiding more than 10,000 bitcoin. Kwon moved the bitcoin from Terraform and associated companies to a self-custody wallet. Since UST plummeted in May 2022, the wallet’s bitcoin was moved to an unknown Swiss bank and changed into currency. More than $100 million in fiat money has been taken out of the bank since June of last year.
Being unable to pinpoint Kwon’s location makes it difficult to bring him to trial. He has apparently been seen in Serbia, and South Korean prosecutors recently traveled there to speak with Serbian authorities about his case, according to a story from Bloomberg last week. His South Korean passport has been suspended, and Interpol has placed him on its wanted list.
Kwon has been fairly active on Twitter, but he has remained evasive in discussions with media when it comes to his whereabouts. In November, he made a remarkable appearance on the UpOnly podcast, when ex-con ‘Pharma Bro’ Martin Shkreli informed him that prison wasn’t all that horrible.