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The prominent stablecoin TerraUSD, which collapsed last year wiping out around US$40 billion in market value, was built on a fraud, U.S. regulators are now alleging.

The U.S. Securities and Exchange Commission (SEC) charged Singapore-based Terraform Labs PTE Ltd. and its founder, Do Hyeong Kwon, with an array of securities law violations that, it alleged, amounted to a multi-billion dollar cryptoasset securities fraud.

“As alleged in our complaint, the Terraform ecosystem was neither decentralized, nor finance. It was simply a fraud propped up by a so-called algorithmic “stablecoin” — the price of which was controlled by the defendants, not any code,” said Gurbir Grewal, director of the SEC’s enforcement division, in a release.

According to the SEC’s complaint, Terraform and Kwon violated securities laws by creating a series of inter-related cryptoassets — including TerraUSD (UST), the LUNA token and mAssets — that amounted to unregistered securities and securities-based swaps, and that they defrauded and deceived investors, including about the operation of UST’s purported algorithmic peg to the U.S. dollar.

The regulator alleged that, after the UST lost its peg to the U.S. dollar in May 2021, the company and Kwon and secretly propped up its value by having a third party purchase massive amounts of the token, but then publicly claimed that the peg had been restored as a result of its algorithm working as intended, without human intervention.

After that event, investors poured billions into the token, the regulator noted.

However, when the token lost its peg again in May 2022, and there was no secret intervention to restore it, the value of UST (and LUNA) collapsed, wiping out billions worth of investors’ assets, “sending shockwaves through the crypto asset community,” the SEC said in its complaint — noting that some retail investors lost their life savings, and institutional investors lost billions, as a result.

The SEC also alleged that Terraform and Kwon misled investors by claiming that a popular mobile payment app in Korea used the Terra blockchain to settle transactions, when, in reality, the transactions were settled using traditional processes, and then “deceptively replicated” on the blockchain to trick investors by making it appear that the blockchain had a real world use.

“We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD,” SEC chair Gary Gensler said in a release.

“We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors,” he added.

The allegations have not been proven.