A jury in the Southern District of New York has found Terraform Labs and its co-founder Do Kwon liable for defrauding investors in a civil lawsuit brought by the United States Securities and Exchange Commission (SEC).
The verdict, announced on April 5, 2024, marks a significant moment in the ongoing saga surrounding the dramatic collapse of TerraUSD (UST), a so-called algorithmic stablecoin, in May 2022. We are pleased with today’s jury verdict holding Terraform Labs and Do Kwon liable for a massive crypto fraud,” said SEC Enforcement Director Gurbir Grewal. He added:
“Terraform Labs and Kwon, its former CEO, deceived investors about the stability of the crypto asset security and so-called algorithmic stablecoin Terra USD, and they further misled investors about whether a popular payment application used Terraform’s blockchain to process and settle payments.”
The Terra Ecosystem and Its Downfall
Terraform Labs, founded in 2018 by Do Kwon, aimed to create a blockchain ecosystem centered around two key digital assets: Luna (LUNA), a volatile cryptocurrency, and UST, an algorithmic stablecoin designed to maintain a one-to-one peg with the US dollar. Unlike traditional stablecoins backed by real-world assets, UST relied on an algorithm that automatically created or burned LUNA tokens to maintain the peg.
However, in May 2022, UST lost its peg to the dollar, triggering a domino effect that sent both LUNA and UST into a death spiral. Investors lost billions of dollars as the value of their holdings plummeted. The crash sent shockwaves through the entire cryptocurrency market and raised serious concerns about the stability of algorithmic stablecoins.
The SEC Steps In: Accusations of Fraud
In the wake of the TerraUSD collapse, the SEC launched an investigation into Terraform Labs and Do Kwon, suspecting potential violations of securities laws. In January 2024, the SEC filed a civil lawsuit against them, alleging that they had misled investors about the stability of UST and the overall operations of the Terra ecosystem.
One key accusation centered around Anchor Protocol, a decentralized finance (DeFi) application that offered high interest rates on UST deposits. The SEC claimed that Terraform Labs failed to disclose the inherent risks associated with Anchor Protocol and its role in maintaining the UST peg. Additionally, the SEC argued that Terraform Labs misled investors about the extent of UST’s adoption by mainstream payment applications.
Trial and Verdict: A Blow to Terraform Labs
Despite Do Kwon’s absence from the courtroom due to his ongoing extradition battle between the US and South Korea, the trial proceeded in March 2024. Following a short deliberation, the jury found both Terraform Labs and Do Kwon liable for defrauding investors. This verdict represents a major victory for the SEC and its efforts to hold bad actors in the cryptocurrency space accountable.
The implications of the SEC’s victory are far-reaching. It sets a precedent for future regulatory actions against cryptocurrency projects and underscores the SEC’s stance on algorithmic stablecoins. While the exact penalties for Terraform Labs and Do Kwon remain to be determined, the verdict casts a long shadow on the company’s future. Investors who lost money due to the UST collapse may also pursue individual lawsuits against Terraform Labs.
