Terraform Labs and Terra creator Do Kwon were ordered on June 8 to comply with a probe by the U.S. Securities and Exchange Commission (SEC). However, the investigation is not directly related to the network’s collapse in May.
The regulator, led by crypto-skeptical chair Gary Gensler, is looking to ascertain whether Terra’s tokens constitute unregistered securities — similar to the long-standing case against Ripple and the recent Binance investigation.
Terra Faces SEC Scrutiny Over Illicit Token Sales
Per a Wednesday Law360 report, the SEC’s probe dates back to September 2021 when the agency served Do Kwon and Terraform Labs with subpoenas while the CEO was attending a crypto conference in New York.
A court ruled this week that Kwon cannot evade the inquiry by virtue of Terraform Labs being a South Korea-registered business because it also serves United States customers. The court also threw out Kwon’s claims that the SEC didn’t have the right to send him a subpoena.
In particular, the securities watchdog is examining Terra’s DeFi project, Mirror Protocol. On Mirror, users were able to trade synthetic versions of real stocks and cryptocurrencies. But a significant price discrepancy between LUNA Classic and the new LUNA token enabled multiple exploits, in which the attacker reportedly drained millions of dollars from Mirror Protocol.
(It’s worth mentioning here that no wrongdoing has yet been alleged by the SEC, and we don’t even know whether it will bring an enforcement action against Kwon and Terraform Labs.)
Kwon Firmly In Legal Crosshairs Following Terra Collapse
Do Kwon and the Terraform Labs have come under fire in recent weeks after Terra’s historic downfall.
Last month, authorities in South Korea estimated that over 275,000 of its citizens were victims of the abrupt collapse of UST and LUNA. Some of these investors have already initiated legal action against Kwon.
Additionally, the South Korean Conservative Party summoned Kwon to a parliamentary hearing on the matter. Terraform Labs became embroiled in yet more controversy in late May as South Korean authorities subpoenaed all former employees of the company to investigate possible internal price manipulation.
And today, it has been revealed by the Financial Times that the Seoul Metropolitan Police Agency is investigating allegations of embezzlement of an undisclosed amount of bitcoin from Terra’s treasury.
Terraform Labs co-founder Daniel Shin has rebutted accusations of misconduct and fraud, maintaining that there was “no intention of deception” and that the firm wanted to revamp the payment settlement system using blockchain technology.
Besides causing legal troubles for Kwon and Terraform Labs, the meltdown of Terra has also prompted regulators in a handful of different nations to intensify the pressure on cryptocurrencies.
Notably, Kwon’s efforts to resurrect the embattled Terra ecosystem have been mostly unsuccessful. The prices of the tokens associated with both the new and old Terra chains are still stuck in the doldrums.