The US Securities and Exchange Commission (SEC) might not be a shining beacon of hope for many, after it constantly shuts down crypto related products and sues companies trying to innovate, but for once, it’s actually looking to do some good. On February 16, the SEC dropped a 55-page complaint in the US District Court for the Southern District of New York, rammed full of charges relating to fraud.
The SEC is officially charging Terraform Labs and its founder, Do Kwon with orchestrating a multi-billion-dollar crypto fraud scheme that involved an algorithmic stablecoin. The SEC doesn’t mess around once it charges someone, so once Do Kwon eventually pops his head up again, it’s good night!
SEC Says UST Wasn’t Algorithmic
The SEC has an interesting way of seeing the world, and it’s opted to see UST as not algorithmic. Basically, Do Kwon touted UST, the TerraUSD stablecoin, as algorithmic and yield-bearing. What this means, on paper, is that UST would improve market stability through pre-programmed supply matching. But, after Bitcoin tanked hard, UST’s mechanisms couldn’t keep it afloat, and it eventually tumbled. The fact that it was also yield-bearing also means that UST would fall foul of the same marketing scuppers that Kraken recently fell afoul of with its yield products.
The SEC has alleged that UST wasn’t actually algorithmic, stating that Do Kwon controlled the price, rather than code. An extract from the complaint states: “We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD, […] They committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
Just Trying to Protect Investors and Markets
The fallout from the UST crash was devastating, causing thousands of investors and traders around the world to lose billions of dollars. The SEC is working as hard as it can to clean up the stablecoin and crypto yield product scene to protect future investors and prevent this sort of crisis from happening again.
Interestingly, despite being on Interpol’s red list of wanted individuals, Do Kwon is still on the run, living a free life – SBF should take some notes on hiding from Kwon. Do Kwon’s offices in Seoul have been raided by authorities revealing troves of data that highlight just how poorly the UST product was run.
Stablecoins are designed to maintain a constant value by being backed by underlying assets, typically USD. However, this algorithmic stablecoin was meant to be more secure, even offering yield to those that held it. But as we’ve seen, this clearly isn’t a safe product and should be labeled as high risk, only offered to investors capable of understanding that risk, such as Accredited Investors. The UST debacle has dragged stablecoins through the mud once again, but it’s nothing that the more reputable coins can’t shake off.
Concerns about BUSD, Binance’s USD stablecoin have risen in the past week or so, and it looks like a top contender to be the next stablecoin to plummet back down to Earth, destroying more markets.
What Propped up UST Value?
It’s alleged that UST was actually controlled by Do Kwon manually, rather than algorithmically. Kwon allegedly carefully adjusted its supply based on BTC and other crypto reserves. But once the crypto markets took a tumble, Do Kwon’s company no longer had enough BTC on the books to prevent a bank run scenario and saw its balance sheets drained. In a bid to stabilize the price, Kwon sold off more BTC, but this only sank the BTC market further, causing the problem to deepen. Several major exchanges and investment firms were long on UST and Terra, so once this happened it took them down with it.
Is Do Kwon responsible for most of the mess we saw last year, such as FTX collapsing and multiple crypto hedge funds going under? Quite possibly so. Once the SEC gets hold of Kwon we’ll see some huge fines in line and possibly some jail time. Exciting times ahead!