The Securities and Exchange Commission on Thursday said it had sued Singapore-based Terraform Labs and its CEO Do Kwon, accusing them of defrauding U.S. investors in a multi-billion dollar scheme centered around an “algorithmic” stablecoin called Terra USD.
That token, which attempted to keep a value pegged to the dollar through an algorithmic arbitrage mechanism, collapsed last May, helping to kick off a crypto crash and wave of bankruptcies that culminated in $2 trillion in lost token value.
The SEC said Kwon and his company raised billions of dollars from investors by selling unregistered securities including Terra USD. The company also sold tokens designed to mirror the returns of U.S. stocks, the agency said.
Terraform Labs did not immediately respond to a request for comment.
SEC Chair Gary Gensler in a statement said the firm “committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
At its peak, Terra USD was one of the largest stablecoins, with a value of more than $18 billion. Investors flocked to the coin in part because they could deposit it in a protocol promising a 20% yield. The coin attempted to maintain its peg through an arbitrage mechanism whereby investors could swap the coin for a sister token, called Luna, at rate that encouraged the price to stay close to $1. However, that mechanism relied on Luna itself retaining value.
In May, Terra USD depegged, leading to a collapse in the prices of Terra USD and Luna that eventually drove both to be nearly worthless. Crypto firms that had bet on the tokens themselves entered financial distress, helping to lead to a broader crash.
The SEC filed the complaint in federal court in the Southern District of New York.
Write to Joe Light at joe.light@barrons.com
Credit: marketwatch.com