The U.S. Securities and Exchange Commission (SEC) charged Terraform Labs and its chief Kwon Do-hyung with crypto asset securities fraud in accordance with the Securities Act of 1933 last week in the Southern District of New York. Terraform Labs, a cryptocurrency issuer, caused the collapse of cryptocurrencies Terra and LUNA in May last year. Kwon, who caused a minimum of 40 billion dollars of loss to investors around the world, will have to stand before the court in the U.S.
Kwon became an important figure in the cryptocurrency industry by issuing stablecoins Terra and LUNA, which fix their prices to the U.S. dollar one-to-one and prevent value drops with a complementary algorithm. However, Terra could not maintain its price and fell 99.99 percent following a massive coin dump last year. As U.S. investors’ losses grew, the SEC hurried judicial action against Kwon, who is in hiding in Eastern Europe.
What’s noticeable is that the SEC applied the Securities Act to Kwon by defining Terra and LUNA as unregistered securities. So far, it was hard to charge similar cases with securities fraud since it was unclear if cryptocurrencies were securities and it was hard to prove if there was an intention to cause damage to investors. This is why Kwon repeatedly claims that it was a failure, not fraud. He is also suspected of having transferred over 10,000 Bitcoins to a Swiss bank account and cashed out 100 million dollars worth of them to use for his escape.
This time, the SEC viewed Terra and LUNA as securities because there was an issuer and funds expecting return were invested. Also, the bill of the indictment states that Kwon did not properly notify investors of the price fall possibility, which was known to him. The judgment of the SEC, a quasi-judicial body, will affect South Korea’s investigation of the case. The court dismissed an arrest warrant against Kwon issued by the prosecution in October last year on a charge of violating the Financial Investment Services and Capital Markets Act by stating that there was no evidence to prove that the cryptocurrencies were securities. Now, they have a new logical ground.
Some frauds caused damage of three trillion won in 2021 and over one trillion won in 2022 in South Korea as young people in their 20s and 30s, as well as retirees, invested in defective cryptocurrencies that have no actual value. The prosecution and the police should accelerate the investigation of and punishment for cryptocurrency fraud, which has been slowing down, based on the SEC’s judgment. The South Korean National Assembly should also hurry the legislation of law on cryptocurrency markets, which has been delayed for over a year.