Recall that the TerraUSD (UST) algorithmic stabelcoin lost its peg to the US dollar in May last year. Terraform Labs management at first said the situation was supposedly under control, well they will be able to restore the peg to the exchange rate. However, after some time, the Terra project’s native token began to plummet due to attempts to save the Stablecoin. In the course of the collapse, the coin devalued to almost zero, and Terra’s prospects were put to rest.

Eventually, the project was restarted, but without the algorithmic Stablecoin. The victims of the collapse received an airdrop – that is, a free distribution – of the new token. However, the volume of the latter was extremely small and did not even come close to covering the losses of participants in the Terra ecosystem. Experts agree that investors’ losses amount to tens of billions of dollars.

Terra creator Do Kwon

To what does the project owe its popularity? Its main feature is its ability to block UST Stablecoin to earn 20 percent interest. Naturally, such a feature is extremely attractive, because the value of stabbles should ideally be linked to the exchange rate of the asset at its base - in this case, the dollar. Consequently, the risks of users were virtually non-existent in theory, so they invested quite large sums in the ecosystem.

However, in reality such a return does not exist, well the whole scheme collapsed. And now the Securities and Exchange Commission has to find the culprits – albeit eight months later.

What will happen to the creator of Terra

The regulator said in a statement that Kwon and Terraform Labs offered and sold “an interrelated set of securities in the form of crypto-assets, many of which were issued in unregistered transactions”.

That is, in this case, the Commission again used its favourite tactic in the fight against the popularisation of cryptocurrencies - accusing their creators of unregistered offerings of securities. Similar language has been heard in the Ripple case involving the XRP token, which has been dragging on since December 2020. Although in this case, Do Kwon clearly deserves to be punished because of the sheer amount of losses by investors of his own project.

The announcement on the SEC’s official Twitter account

The regulator is referring to UST and LUNA tokens under this definition. The Commission also mentioned mAssets, cryptocurrency derivatives that are based on the share price of publicly listed companies. It also touched on the issuance of Mirror (MIR), the control token for the Mirror protocol, which lists mAssets.

Terra co-founder Do Kwon

According to US Securities and Exchange Commission chairman Gary Gensler, the creators of the Terra project “have failed to provide full, fair and truthful disclosure to the public” – especially in relation to UST and LUNA. Here is his rejoinder.

We also argue that they orchestrated a fraudulent scheme, repeating false and misleading claims in order to gain investors’ trust and steal their money.

The fall of the LUNA token

According to Cointelegraph’s sources, the Commission’s lawsuit was filed in the US District Court for the Southern District of New York, which is also now handling the case of FTX bankrupt cryptocurrency exchange founder Sam Bankman-Fried. The formal charges are violations of securities registration regulations and fraud. Terraform Labs has also been recalled for promoting the Anchor Protocol, which offered yields of up to 20 per cent on UST deposits – another unrealised promise by Do Kwon.

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Do Kwon’s tweet from September 2022 comes to mind here. At the time, he said he was willing to cooperate with any agencies, as they had “nothing to hide”. Apparently this is not the case, and on top of that a delegation from South Korea, including the country’s prosecutors, has already sought him out in Serbia.

Do Kwon’s tweet about his willingness to cooperate with the authorities

All in all, Do Kwon is indeed to blame for the huge losses of investors – a fact that becomes especially clear after sorting out all the details and background that led to Terra’s collapse. Nevertheless, the Commission’s lawsuit against him and his company has its pitfalls, says Gabriel Shapiro, general counsel at investment firm Delphi Labs.

The case could serve as a roadmap for the regulator’s fight against the industry’s other stackablecoins, he said. Still, the US Securities and Exchange Commission has made the case that Terra’s algorithmic stablcoin is a security. Here is the relevant quote.

The Commission will argue that the integration, promotion, marketing, commercial transactions and so on, i.e. actions to create the stabelcoin ecosystem, are “efforts by others” that are “reasonably expected” and can lead to profits in connection with stabelcoins.

Tweet by Gabriel Shapiro

That is, the Commission could demand that tokens in the Terra ecosystem be recognised as securities. And that would already set a precedent for many other stabelcoins – and they, in theory, could also be classified as securities. Such a scenario fits with the general pattern of recent regulatory action – targeted actions against cryptocurrency exchange Kraken and Paxos. However, even in the worst-case scenario, the cryptocurrency market would either move to algorithmic decentralized stackablecoins like DAI or find new products outside of US jurisdiction.


We think the SEC's response in this case has been extremely slow, as more than six months have passed since Terra collapsed. Obviously, the regulator's efforts should be focused on preventing such situations and not on fighting harmless steaking or stabelcoins. Its representatives would then be able to protect investors from losses rather than profits.