The US Securities and Exchange Commission (SEC) has launched a lawsuit against Terraform Labs and its founder, Do Kwon, over allegations of “orchestrating a multi-billion dollar crypto asset securities fraud”.

Terraform Labs was the company behind the failed TerraUSD stablecoin, which collapsed last year and caused a wave of bankruptcies in the cryptocurrency industry.

The SEC released a statement on February 16th, stating that Terraform Labs and its founder, Do Kwon, allegedly offered and sold an interconnected suite of crypto asset securities, many of which were sold in unregistered transactions. The SEC referred to the company’s algorithmic stablecoin, TerraClassicUSD (USTC), which ultimately failed, and its associated cryptocurrency, Terra Luna Classic (LUNC).

According to the complaint, the SEC alleged that Terraform and Kwon misled investors on various issues, including who was using TerraUSD for payments. The agency also referred to both the yield-bearing Anchor Protocol and the LUNA token as “crypto asset securities”. Terraform Labs and Do Kwon promoted the Anchor Protocol, which was advertised to pay out 20% interest on USTC deposits.

The Collapse of the USTC and LUNC prices: What led to it?

The SEC lawsuit alleged that Terraform Labs and Do Kwon misrepresented the stability of the algorithmic stablecoin UST, which was meant to be pegged to the US dollar.

The suit stated that if UST’s price fell below $1 and was not quickly restored by the algorithm, it would lead to the collapse of the entire Terraform ecosystem, as there were no reserves or backing for UST and LUNA, which were formerly known as TerraUSD (UST) and Terra (LUNA).

According to a statement from the SEC’s Director of Enforcement, Gurbir Grewal, the project in question was described as “neither decentralized nor finance”. He claimed that it was a fraud that relied on an algorithmic stablecoin that was controlled by the defendants, not any code.

The complaint claimed that the defendants misled investors on several other issues related to Terraform Labs’ offerings.

Gary Gensler further criticized that Terraform and Kwon did not provide the public with full, fair, and truthful disclosure, especially for USTC and LUNC.

Gensler also added that the defendants committed fraud by repeating false and misleading statements to gain trust and ultimately leading to devastating losses for investors.

The SEC also targeted Terraform Labs and Kwon for their handling of mAssets, which are crypto derivatives that track the stock prices of publicly listed companies, and the issuance of Mirror (MIR), a governance token for the Mirror protocol that lists mAssets.

The complaint alleged that the company and Kwon sold MIR as an unregistered security, even though it was marketed as a “utility” token, and that they made misleading statements about the risks associated with investing in the token.

The SEC has lodged a complaint in the U.S. District Court for the Southern District of New York, consisting of 55 pages, with allegations related to the violation of registration and anti-fraud provisions of the Securities Act and the Exchange Act.

In May of last year, USTC lost its peg to the U.S. dollar, leading to a collapse in its price, and subsequently, the price of LUNC, effectively wiping out their value. This triggered a market-wide collapse in the digital asset market, resulting in an estimated loss of $40 billion in value.

Gensler praised the SEC’s staff for their investigation, and also stated that “The defendants attempted to prevent us from obtaining important information about their business.”.

He further added, “This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws.”.

Is Do Kwon still on the run?

Kwon, who is a South Korean national, is currently on the run and is believed to be in Serbia. He left his residence in Singapore sometime in September after a Seoul court issued an arrest warrant for him. Interpol later issued a Red Notice for Kwon to law enforcement agencies worldwide in September.

Kwon has denied allegations that he’s hiding from authorities and Terraform has accused South Korea of “highly politicized” prosecution against Kwon.