Market Analysis

SEC Expands Probe Into Terraform Labs UST Marketing: Report


The SEC is reportedly investigating whether Terraform Labs violated federal investor-protection regulations with its UST marketing.

Key Takeaways

  • The SEC is reportedly probing Terraform Labs over suspicions of violating investor-protection laws.
  • Specifically, the agency is interested in how the firm marketed its now crumpled UST stablecoin to U.S. customers.
  • The news comes a day after the U.S. Court of Appeals ordered Kwon and his company to comply with the SEC’s investigative subpoenas.

The U.S. Securities and Exchange Commission has reportedly expanded its Terraform Labs investigation beyond the Mirror Protocol probe and into the company’s marketing practices concerning its now crumpled UST stablecoin.

SEC Probes Deeper Into Terraform Labs

The potential legal troubles for Terraform Labs and its CEO Do Kwon keep mounting.

According to a Thursday Bloomberg report, the U.S. Securities and Exchange Commission has expanded its Terraform Labs probe to investigate whether the company violated federal investor-protection regulations with its UST marketing. The news of the widened investigation comes a day after the U.S. Court of Appeals ordered Terraform Labs and its CEO Do Kwon to comply with the SEC’s investigative subpoenas requesting them to provide testimony and documents concerning the operation of the Mirror Protocol on Terra. 

The SEC began investigating Kwon and Terraform Labs for allegedly selling unregistered securities in the U.S. through the Mirror Protocol in May 2021, long before Terra’s $40 billion ecosystem collapse that resulted from UST’s faulty architecture design. Built by Terraform Labs, Mirror Protocol is a blockchain application for creating and trading synthetic assets that track the price of real-world securities, including stocks of companies listed on U.S. stock exchanges. 

The SEC, which likely considers these synthetic assets securities, was initially only investigating whether Kwon and Terraform Labs broke securities laws by selling these unregistered securities to U.S. customers. However, according to anonymous sources cited by Bloomberg, the securities agency has expanded its probe to examine whether Terraform Labs may have also broken investor-protection provisions by falsely marketing UST as a stablecoin reliably pegged one-to-one with the U.S. dollar.

According to the South Korean newspaper JTBC, the SEC has also reportedly discovered that Kwon had been funneling roughly $80 million in company funds per month to his own personal cryptocurrency wallets, raising money laundering suspicions with the agency. Per the local newspaper, internal statements allegedly secured by the SEC revealed that “the funds flowed into dozens of cryptocurrency wallets,” with one of the key internal informants claiming that Kwon did not officially receive a salary from the company.

JTBC hasn’t cited sources or otherwise provided any proof regarding its alleged insights into the SEC’s investigation.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.

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