It’s been nine months since the crypto coin Terra Luna crashed in May 2022. The collapse is estimated to have cost a mammoth $40 billion to investors.
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Terra Founder Accused Of Fraud
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And now, the U.S. Securities and Exchange Commission has charged crypto developer Do Kwon and his company Terraform Labs with defrauding investors in what the regulator deemed a multibillion-dollar scheme, according to a filing in federal court.
31-year-old Kwon founded blockchain platform Terraform Labs and was the primary developer of two cryptocurrencies (Terra and Luna) whose collapse roiled crypto markets around the world last year, months before the FTX collapse occurred.
Also Read: Binance CEO Says He’s ‘Poor Again’ After Terra Luna Holdings Crash
What The Court Filing Says
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Kwon raised billions of dollars from investors beginning in April 2018 by selling a series of interconnected digital assets, many of which were unregistered securities, the SEC alleged in a court filing in the Southern District of New York, as per a Reuters report.
The SEC filing did not say where Kwon was living. In September, a South Korean court issued an arrest warrant alleging that Kwon was residing in Singapore, but the Singapore Police Force said he was not currently in the city-state.
TerraUSD, an algorithmic stablecoin supposed to maintain a 1:1 peg to the U.S. dollar, derives its value through another paired token called Luna.
Both tokens lost nearly all their value when TerraUSD, also known as UST, slipped below its 1:1 dollar peg in May 2022. Prior to its collapse on May 9, TerraUSD had a market cap of more than $18.5 billion and was the tenth-largest cryptocurrency.
According to the SEC’s complaint, Terraform Labs and Kwon misled investors about the stability of UST, and claimed that the firm’s crypto tokens would increase in value.
“This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws, but it also demonstrates the strength and commitment of the SEC’s
dedicated public servants,” said SEC Chair Gary Gensler in a statement, as per the report.
Market Turmoil After Terra Luna Crash
The market turmoil that ensued after the collapse of TerraUSD in May last year led to the failure of several major crypto companies including U.S. crypto lender Celsius Network and Singapore-based crypto fund manager Three Arrows Capital.
Also Read: 5 Crypto Firms That Filed For Bankruptcy Besides FTX
Former FTX CEO’s Possible Role
Less than a month after FTX’s collapse, the revelations around how investors’ money was misused in it prompted a re-examination of the implosion of the Terra algorithmic stablecoin ecosystem since December last year.
US prosecutors are said to be investigating Bankman-Fried, the founder of collapsed crypto exchange FTX and its sister trading platform Alameda Research, regarding his possible involvement in orchestrating the death spiral of TerraUSD (UST) and its affiliated token Luna, according to a report in the New York Times citing people with knowledge of the matter.
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The Terra ecosystem was helmed by the symbiotic relationship between the two tokens, which was managed by lines of automated code to govern circulation. If the price of UST went above $1, traders were incentivized to swap Luna for UST at a profit and vice versa, thus in theory keeping UST’s circulation in check.
But when investors lost confidence in one, the other went down too, and so they were locked in a so-called death spiral that saw Terra Luna’s value plummet to nearly zero in a week’s time in May 2022.
However, who was responsible for the decline has remained a mystery since then. There were two sides to this trade, as per the Bloomberg report.
The first is the side that traders can see on-chain, where wallet addresses were visibly swapping UST for other tokens, and that caused the market to start to panic. The other is on centralised exchanges’ order books, where the “who’s who” is harder to track because user information is not disclosed by platforms.
Also Read: How 10 Major Cryptocurrencies Performed Last Year
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