Terraform Labs And Do Kwon, Faced Trial On Fraud Allegations In New York

Do Kwon, founder of Terraform Labs, while in Montenegro (photo: x @whynotpump)

JAKARTA - Do Kwon, founder of Terraform Labs, along with the Singapore-based blockchain company, is scheduled to face a trial on Monday, March 25 in Manhattan over regulatory claims that they had lied to investors before the fall of the company's two cryptocurrencies, which rocked the market in 2022.

The United States Securities and Exchange Commission (SEC) accused Kwon and the blockchain company of misleading investors in 2021 about TerraUSD's stability, a stablecoin designed to maintain a value of 1 US dollar. Regulators also accused them of misclaiming that the Terraform blockchain was used in the popular mobile payment app in Korea.

Kwon will not attend the trial. He was arrested in Montenegro in March last year and awaiting extradition to South Korea, where he was faced with criminal charges. A court in Montenegro on Friday March 22 postponed his extradition after the prosecutor's office there voiced concerns about the proceedings.

Federal prosecutors in New York have also accused Kwon of fraud and is seeking his extradition to the United States.

Kwon designed TerraUSD and Luna, a more traditional token whose value fluctuates but is closely related to TerraUSD.

The SEC estimates investors will lose more than $40 billion from both tokens when the TerraUSD peg against the dollar cannot be maintained in May 2022.

Their fall also drew down the value of other cryptocurrencies, including bitcoin, and caused wider chaos in the crypto market, resulting in several companies filing bankruptcy in 2022.

The SEC said that Kwon and Terraform had secretly arranged for third parties to buy large amounts of TerraUSD to shore up prices when the stablecoin slipped from its peg a year earlier, in May 2021. Regulators say Kwon mislinked the recovery to the reliability of TerraUSD's algorithm.

The SEC also claims that Kwon and Terraform incorrectly announced that the Terraform blockchain was used to process and complete transactions between customers and traders on the Chai payment app.

Kwon and Terraform have denied wrongdoing and said the SEC took Kwon and other Terraform employees' statements from their context.

The SEC is seeking civil financial sanctions and orders banning Kwon and Terraform from the securities industry.

A spokesman for the United States District, Jed Rakoff, gave the SEC a partial victory in December, deciding that Terraform Labs had unlawfully sold digital assets without registering them as securities.

The judge rejected SEC claims that Terraform and Kwon illegally offered security-based swaps through features that allow users to create digital assets that reflect other asset prices, such as cryptocurrencies or other stocks.

The judge has yet to determine the amount of losses Terraform has to pay, but the company, which filed for bankruptcy protection in January, said the fine could exceed its assets.