The U.S. Securities and Exchange Commission late Thursday released a 55-page document detailing various charges of fraud against Do Kwon and Terraform Labs, the company Kwon founded to develop the Terra blockchain. Broadly, the SEC alleges that Kwon and others "engaged in a scheme to deceive and mislead investors … in the U.S. and abroad." Indeed, the SEC's findings paint a much clearer picture of the entire Terra system as a fraud, one just as elaborate and calculated as Sam Bankman-Fried's FTX, and contain a number of major revelations about claims that were previously merely suspected or entirely unknown. Here are four of the most important discoveries.
1) TerraUSD's "stability" was a complete and conscious fabrication.
The most important new information laid out by the SEC is that in May 2021, when it experienced a small depegging from its $1 target price, Terraform and Kwon "secretly discussed with a third party that the third party would purchase massive amounts of UST to restore the $1.00 peg." This worked, and terraUSD returned to $1. But this bailout was not discussed publicly. Instead, Kwon and others cited the May 2021 restoration of the peg as proof that terraUSD was "automatically self-heal[ing]." This narrative, which the SEC calls a complete fabrication, was key to enticing subsequent investors into the scheme.
2) Do Kwon and his allies are cashing out – big time
There have been a variety of tentative attempts to trace funds, particularly bitcoin, flowing out of Terraform Labs and affiliated entities after the collapse of the Terra system. Most recently, a South Korean news site claimed to have spotted Do Kwon cashing out about $100,000 worth of BTC in Serbia. But the SEC allegations include vastly more concrete and sweeping claims. They claim that Kwon and accomplices "transferred over 10,000 bitcoin from Terraform and Luna Foundation Guard … accounts to an un-hosted wallet." They have, the SEC claims, converted over $100 million of that bitcoin into fiat withdrawals through a Swiss bank since June 2022. So Do Kwon may yet be living very high indeed in his Serbian spider hole.
3) The Chai "deal" was even faker than we thought.
It has long been understood that Do Kwon overstated the extent and duration of the relationship between Terra and the Chai payments platform, an e-commerce system in South Korea. Specifically, Kwon was known to have claimed Chai was using Terra for payments processing long after any such partnership had ended. But the SEC details far more proactive, in some cases incredibly elaborate, efforts to misrepresent the Chai-Terra relationship. Above all, it describes the use of a server, known internally at Terraform as the "LP Server," which "replicated the real transactions that Chai was processing in Korean won." In reality, according to the charges, "no Chai transactions occurred on the blockchain."
In other words, not only did Do Kwon exaggerate the Chai-Terra relationship in his own statements, he created an entire fake server to move fake money around to simulate fake transactions, with the clear goal of deceiving investors.
4) It turns out U.S. regulation does matter.
Finally, one for fun: In an infamous 2021 interview on CoinDesk TV, anchor Christine Lee challenged Do Kwon on his apparent disregard for U.S. regulators and enforcement. He said U.S. regs were "not that interesting." Well, it turns out that even if Do Kwon wasn't interested in U.S. law, U.S. law is very interested in Do Kwon. As detailed in the new charging documents, Kwon and his team "engaged in conduct within the United States that constituted significant steps in furtherance" of their alleged crimes. The documents detail a healthy number of U.S. victims and argue the conduct described "had a foreseeable substantial effect within the United States," giving ample legal standing for the SEC's charges.
This wealth of new information is, frankly, a bit unusual in this sort of charging document, particularly in crypto-fraud cases. The SEC seems to have really done its homework here, taking advantage of its power of punishment to compel evidence and testimony from cooperators.
– David Z. Morris
@davidzmorris
david.morris@coindesk.com
