TL;DR:
- The SEC has filed fraud charges against Terra and its founder Do Kwon, alleging he fabricated details to boost growth on the Terra ecosystem before its collapse in 2022.
- Among the allegations, Kwon is accused of transferring 10,000 Bitcoin out of Terraform Labs and Luna Foundation Guard (LFG) to a Swiss bank account, worth almost $250 million at today’s prices.
- The SEC also alleges that Terra never replaced Chai’s payment systems and that Kwon secretly discussed plans with a third party to buy a large portion of UST to boost its price.
The recent SEC lawsuit against Terra and its founder Do Kwon has sent shockwaves through the cryptocurrency industry. The allegations against Kwon are serious and potentially devastating for investors who have lost huge amounts of money due to the collapse of the Terra ecosystem in 2022. As an NPC consultant with experience in the cryptocurrency industry, I believe it is important to examine the key takeaways from this lawsuit.
10,000 Bitcoin Allegations
Perhaps the most startling of the allegations made against Kwon is that he transferred 10,000 Bitcoin out of Terraform Labs and LFG to a Swiss bank account. The stash is worth almost $250 million at today’s prices. According to the SEC, Kwon has been transferring BTC from wallets belonging to Terraform and LFG to a Swiss bank account, where he has been converting it to cash. The SEC alleges that over $100 million in fiat currency has been withdrawn from that Swiss bank between June 2022 and the date of the complaint. If true, this stands in stark contrast to the investors who lost huge amounts of money when UST crashed last year. The SEC lawsuit specifically mentions a pharmacist in California who borrowed $400,000 against their home to purchase UST and a painter in Vermont who invested $20,000 that was otherwise earmarked for his son’s college tuition.
The Chai Lie
Kwon made some big claims about the Terra network and UST on the road to becoming the third-largest stablecoin. But Terra’s partnership with payments app Chai didn’t involve the kind of integration that Kwon promised, according to the SEC lawsuit. It’s a big allegation to make, considering that Chai founder Daniel Shin also co-founded Terraform with Kwon in 2018. In 2019, Terra announced its partnership with Chai, writing in a blog post that it would “rebuild the payments stack on the blockchain to simplify the legacy payment system and provide transaction fees at a discounted rate to merchants.” The company estimated the deal would result in processing “millions—if not billions—in transaction volume.” The SEC alleges that Terra never replaced Chai’s payment systems, and deceptively replicated Chai payments onto the Terraform blockchain to make it appear that they were occurring on the Terraform blockchain. Members of the industry have since said that it was a poorly kept secret that Chai wasn’t really using Terra to facilitate payments.
The Stable Con
The SEC’s lawsuit also alleges that Kwon falsely claimed that the TerraUSD (UST) algorithm helped it regain its one-to-one peg with the U.S. dollar after losing it during a flash crash in May 2021. “UST exhibited extreme peg stability during the 60% price drop,” Kwon wrote on Twitter at the time. However, the SEC alleges that Kwon secretly discussed plans with a third party, which the SEC does not name, to buy a large portion of UST to boost its price. But afterward, Kwon bragged that there had been no human intervention. According to reports, the unnamed trading firm in the SEC’s lawsuit was Jump Crypto, which allegedly walked away with $1.2 billion in profits from the scheme.
Here are some tips for investing in cryptocurrencies:
Research: Understand the technology and the people behind the project. Look for whitepapers, team members, and any news articles or social media posts about the project.
Diversify: Don’t put all your money in one cryptocurrency or blockchain project. Spread your risk across multiple investments.
Stay vigilant: Keep an eye on news and social media for any updates or changes to the project. Be ready to sell if the project looks like it’s not living up to its promises.
The recent SEC lawsuit against Terra and its founder, Do Kwon, is a reminder to investors to do their due diligence and understand the risks involved in investing in cryptocurrencies and blockchain projects. By researching, diversifying, and staying vigilant, investors can minimize their risks and make informed investment decisions.
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