Terraform Labs, alongside its founder Do Kwon, is scheduled to face trial in Manhattan on Monday over accusations by regulators that they deceived investors, triggering the downfall of two cryptocurrencies in 2022.
The U.S. Securities and Exchange Commission (SEC) alleges that Kwon and the Singapore-based blockchain company misled investors in 2021 regarding the stability of TerraUSD, a stablecoin intended to maintain a value of $1. Additionally, they’re accused of falsely claiming Terraform’s blockchain was utilized in a popular Korean mobile payment app.
Kwon, who is not expected to attend the trial, was apprehended in Montenegro last March and is awaiting extradition to South Korea where he faces criminal charges. Federal prosecutors in New York are also charging Kwon with fraud and seeking his extradition to the U.S.
TerraUSD and Luna, a token closely linked to TerraUSD, were both designed by Kwon. The collapse of these tokens in May 2022 resulted in an estimated loss of over $40 billion for investors and caused turmoil in the crypto market.
The SEC alleges that Kwon and Terraform orchestrated a scheme involving a third party to purchase large amounts of TerraUSD to artificially inflate its price when it deviated from its $1 peg. They also assert that Kwon falsely credited the stability of TerraUSD’s algorithms for its recovery.
Despite the accusations, Kwon and Terraform deny any wrongdoing, claiming the SEC misinterpreted statements made by Kwon and other employees.
The SEC seeks civil financial penalties and orders barring Kwon and Terraform from the securities industry. U.S. District Judge Jed Rakoff ruled in December that Terraform Labs unlawfully sold digital assets without registering them as securities, but the determination of damages is pending.
Terraform Labs filed for bankruptcy protection in January, expressing concerns that the penalty sought by the SEC could surpass its assets.
