A complaint was filed with the U.S. District Court for the Southern District of New York on behalf of the SEC. The document refers to various violations by Do Kwon and Terraform Labs, as well as violations related to the securities law. Let's figure out what the SEC document contains and how it can affect stablecoins in general.
The SEC has filed charges against Terraform Labs and Do Kwon, for organizing securities fraud.
Today we charged Singapore-based Terraform Labs PTE Ltd and Do Hyeong Kwon with orchestrating a multi-billion-dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.
— U.S. Securities and Exchange Commission (@SECGov) February 16, 2023
Accusations of deceiving investors and fraudulent schemes.
According to the document, Terraform Labs and Do Kwon are accused of organizing fraud, misleading investors in order to gain trust.
“We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
The document also reveals examples of fraudulent activities committed by Kwon. One of these was pointed out on Twitter by the main exposer of the Terra ecosystem – FatManTerra. He stressed that the SEC confirmed that Terraform's cooperation with the Chai payment platform was a fraudulent scheme to attract investors.
This filing from the SEC wholly corroborates the insider's testimony about Do Kwon faking Chai transaction volume to garner investments into LUNA under fraudulent pretenses. Anchor and the entire Terra ecosystem was founded on a big lie. https://t.co/yOf2ZiPafp pic.twitter.com/yPz4rvAVLq
— FatMan (@FatManTerra) February 16, 2023
Securities-related charges.
One of the key points that caused concern among the crypto community was that the SEC recognized stablecoins and other crypto assets related to the Terra ecosystem as securities. One of their arguments is that Terraform employees promoted potential profits to investors.
This was a wake-up call for representatives of the crypto industry. General counsel of the investment company Delphi Labs, Gabriel Shapiro, analyzed the SEC's reasoning in detail on Twitter. He said that the SEC used the Howey test in its study to give assets the status of securities.
- According to the terms, the investor invests money;
- The investor expects to make a profit from these investments;
- Investments have been made in a joint venture;
- A third party generates and distributes profits to depositors.
The expert also stressed that the SEC used other arguments besides the Howie test. For example, they turned to the term "enumerated security", considering the LUNA token as a receipt.
another first here:
— _gabrielShapir0 (@lex_node) February 16, 2023
-->not using the Howey test for a token, but instead using another type of "enumerated security" term (as @collins_belton and I often speculated would happen)
in this case, they say wLUNA was a "receipt for" a security -- which itself is a security pic.twitter.com/BQd0DYJAtR
The recognition of stablecoin associated with Terra may be the beginning of the SEC's total control over the stablecoin market, Gabriel Shapiro summarizes.
you can expect the argument for UST being a security to be a roadmap for how the SEC goes after other stablecoins
— _gabrielShapir0 (@lex_node) February 16, 2023
they will allege that integration, promotion, marketing, commercial deals etc building the stablecoin ecosystems are "efforts of others" that are "reasonably… https://t.co/2X3SvtWMaU pic.twitter.com/q1odgQcNSA
Now it is difficult to assess the scale of the consequences, since it is not clear whether it will be possible to adjust all the stablecoins to the parameters of securities or whether algorithmic stablecoins like the collapsed UST will be the first to be hit.
Usually active on social networks, Do Kwon did not react to such high-profile accusations in any way. At the same time, the SEC charges are quite serious for Do Kwon, especially in the context of illegal actions with securities. This may be followed by a harsher punishment than for deceiving investors.
Thus, the SEC's lawsuit against Terraform Labs and Kwon may not only be an impetus for the active actions of law enforcement agencies in relation to Do Kwon, but also create a precedent for recognizing other stablecoins as securities and holding the companies to which they belong to, accountable. But probably, the main goal will be not so much punishment, but subordination to regulators, since securities definitely fall under the jurisdiction of the SEC. We will continue our observations of the world of stablecoins and inform you about the news!
