The SEC is suing stablecoin operator Terraform and boss Do Kwon

The U.S. Securities and Exchange Commission has sued collapsed stablecoin operator Terraform Labs and its CEO Do Kwon for allegedly orchestrating a cryptocurrency scam that resulted in billions of dollars in losses.

The SEC complaint filed Thursday said Singapore-based companies Terraform and Kwon raised billions of dollars from investors between April 2018 and May 2022 by selling a series of related digital securities, many of them improperly were registered with the supervisory authorities.

Those assets included TerraUSD, a stablecoin developed by Kwon whose sudden multibillion-dollar collapse last year sent shockwaves across the crypto world, and its related Luna token, the SEC said.

This marked the start of an unprecedentedly tumultuous year for the industry, which saw several once-prominent companies collapse in just a matter of months, capped by the collapse of exchange platform FTX in November.

The SEC said Terraform and Kwon used misleading statements to market their digital assets, such as telling investors that a well-known South Korean mobile payment app used the Terra blockchain to process transactions that increased the value of the Luna tokens would increase.

The SEC claimed that many investors involved in Terraform’s tokens — including a painter in Vermont and a musician and a pharmacist in California — lacked “no significant investment experience” and had obtained information about the assets online, the statement said the complaint. Overall, the scam caused a $40 billion loss in market value, the SEC said.

“This case shows how far some crypto firms will go to avoid compliance with securities laws, but it also shows the strength and commitment of the SEC’s dedicated officials,” Gary Gensler, chairman of the SEC, said in a statement, adding the defendants in the case “attempted to prevent us from obtaining important information about their business.”

The SEC complaint cites a Terraform employee who said in a 2021 conversation with a colleague, “Working at terra has strengthened my belief in conspiracy theories. . . only the white lies. . . and the illusion of decentralization. . . all from the armchair of a single man sipping whiskey,” allegedly referring to Kwon.

The regulator alleged that Terraform and Kwon violated registration and anti-fraud provisions of US securities laws. Attorneys for Terraform and Kwon did not immediately respond to requests for comment.

Kwon, 31, was living in South Korea and Singapore at the time of the alleged fraud, but his current address is unknown, according to the SEC complaint. A South Korean court has issued an arrest warrant for him, the SEC said, citing media reports.

The regulator claimed the defendants transferred more than 10,000 bitcoin from Terraform and other accounts to a wallet not hosted on any exchange. Since May 2022, they have periodically transferred Bitcoin from the wallet to a Swiss bank and then converted it to cash, the complaint says. Since June 2022, more than $100 million in cash has been withdrawn from the bank, the SEC said.

The agency’s move is the latest blow to Terraform and its South Korean CEO, who have faced numerous legal challenges following the collapse of TerraUSD and Luna, causing significant losses to investors.

“Today’s lawsuit not only blames the defendants for their role in the collapse of Terra, which devastated both retail and institutional investors and sent shockwaves through the crypto markets, but underscores once again that we are looking at the economic realities of an offering, not on the labels on it,” Gurbir Grewal, director of the SEC’s Enforcement Division, said in a statement.

The case against Terraform and Kwon is the latest in a series of SEC enforcement actions against cryptocurrency platforms as U.S. regulators escalate a crackdown on digital assets, which has sparked fears among industry officials that crypto could be squeezed out of one of its biggest markets .

Additional reporting by Scott Chipolina