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SEC Charges Against Do Kwon. What Is the Danger for Other Stablecoins?

The SEC is suing Do Kwon and Terraform Labs, which owned the infamous UST.

Do Kwon on the background of the Terra logo and SEC symbols

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.

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.

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.

Screenshot of the document.
Screenshot of the document. Source: SEC

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 four points of the Howie test, a cryptocurrency asset will be recognized as a security and falls under the jurisdiction of the SEC if it meets the following criteria:
- 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.

The recognition of stablecoin associated with Terra may be the beginning of the SEC's total control over the stablecoin market, Gabriel Shapiro summarizes.

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!