SEC Charges to Do Kwon Explained


November 6, 2023


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The Terraform Labs tragedy is still wreaking havoc today. In mid-February, the U.S. Securities and Exchange Commission (SEC) did what many called for: bring charges against Terraform Labs and its CEO, Do Kwon. What will be the outcome of this story? More importantly, what will be the impact of these charges?

First, we must understand the case. Before the collapse of LUNA, Terraform Labs and Kwon raised billions of dollars. The money was invested in LUNA, UST, the logarithmic ecosystem currency, and many "mAssets." These mAssets were exchange-traded products based on stocks of American companies.

After the collapse of the entire ecosystem created by Kwon, a new big problem began.

According to the SEC, all these products offered by Terraform Labs were securities. On the one hand, the first clear violation is the mAssets — they were a fake tokenized version of actual companies. By all accounts, it is hard to justify that this was legal.

On the other hand, you had UST. The biggest selling point of UST was the nearly 20% annual return you could get with it.

Gary Gensler, chairman of the SEC, was the first to speak out on the issue. According to Gensler, Terraform Labs and Do Kwon never provided full, fair, and accurate disclosure to the public. Gensler also claimed that they misled investors, who eventually lost all their invested money.

Simply put, Terraform and Do Kwon committed fraud. Or at least that is what the U.S. regulator believes.

However, there is more to learn from this case — a quick read of the lawsuit reveals a lot. The bottom line is that Do Kwon lied, and a lot.

The first fact the SEC exposes is the May 2021 UST depeg. Back then, UST suffered a $1 mark depeg. After resuming parity, Kwon claimed that UST was "automatically self-healing." Kwon painted that his system was so robust that it self-regulated back to parity.

Well, that was a big lie. Terraform, led by Kwon, secretly negotiated with a third party. This third party bought high amounts of UST to restore parity. Kwon's actions were deceptive and showed a security that never existed.

The failure of Terra also brought another major problem: where are Luna Foundation Guard's BTCs?

When the debacle began, the LFG began selling its BTCs to recover the system. The efforts were insufficient, to say the least — and the whole thing fell like a house of cards. However, Terraform transferred over 10,000 BTC from its accounts to an unhosted wallet.

Also, the SEC claims that they have exchanged more than $100M of those BTC in a Swiss bank since June 2022. So, they are using the money that was supposed to protect the ecosystem — but not for positive purposes.

The SEC's complaint was filed in the U.S. District Court for the Southern District of New York. This court is one of the strictest in the United States.

We also learned that while Kwon's whereabouts are a big question mark, the South Korean police have an idea of where he is. All indications are that Kwon is hiding in Serbia to escape the authorities.

Kwon is wanted everywhere: he has an Interpol red alert; South Korea, his home country, issued a warrant for his arrest. And now he has the SEC and the U.S. government breathing down his neck.

The truth is that Kwon is mainly responsible for a $40B+ debacle. Thousands of people were heavily aggravated by the fall of Terra. One can only hope that justice will be served.