The U.S. Securities and Exchange Commission (SEC) accused stablecoin issuer Terraform Labs and its founder Do Kwon of transferring millions worth of bitcoin to a Swiss bank account following the collapse of LUNA/UST in May 2022, Thursday court filings show. Kwon and Terraform are being sued for misleading customers and selling unregistered securities. Meanwhile, the two largest Mt. Gox creditors, crypto exchange Bitcoinica and an entity called MtGox Investment Funds, will receive 90% of their recovery payments paid in BTC. The firms are recovering less than a quarter of the BTC lost on the storied exchange shutdown nine years ago. Finally, bankrupt lender Celsius Network LLC is accused of failing to properly record its intracompany transactions, making a full reconstruction of a $9.1 billion claim from affiliate company Celsius Network Limited (CNL) impossible. The “best estimate” for the sister company’s claim is $3.5 billion, a filing said.
Risky Business?
Platypus Finance, an Avalanche-based on-chain exchange, suffered a flash-loan attack on Thursday, losing upwards of $8.5 million and has paused operations. Platypus USD (USP), its native stablecoin, fell to 48 cents from its $1 anchor. Meanwhile, TrueFi’s governance token surged 220% after Binance minted $50 million of the decentralized exchange’s stablecoin called trueUSD. This comes after Paxos said it will cease issuing Binance’s BUSD stablecoin amid a regulatory crackdown. Speaking of, Wall Street analysts at Bernstein issued a report downplaying the risk of potential enforcement actions that could be waged against similar stablecoin issuers like Circle. Finally, Binance reportedly moved $400 million from Binance US’ bank account – potentially problematic because the offshore parent exchange lacks licenses to operate in the states.
Room to Run
Japan will launch a pilot program in April to test its digital yen central bank digital currency, which will not yet see actual transactions by laypeople. The move comes after more than two years of proof-of-concept experiments at the Bank of Japan, an organization under transition (to say the least). Unrelated, a unit of Sony teamed up with multi-chain smart contract network Astar Network to launch a Web3 incubation program. Elsewhere, Canada’s primary markets regulator is preparing new requirements for crypto exchanges operating in the country, according to two unnamed sources. The Canadian Securities Administrators announced midway through last year that it required certain compliance “commitments” from unregistered crypto trading platforms operating in Canada while they pursue registration.
Sound Bites: Fractured System
“There’s no other country in the world that has as fragmented a regulatory system as we do.”
The U.S. Securities and Exchange Commission late Thursday released a 55-page document detailing various charges of fraud against Do Kwon and Terraform Labs, the company Kwon founded to develop the Terra blockchain. Broadly, the SEC alleges that Kwon and others “engaged in a scheme to deceive and mislead investors … in the U.S. and abroad.” Indeed, the SEC’s findings paint a much clearer picture of the entire Terra system as a fraud, one just as elaborate and calculated as Sam Bankman-Fried’s FTX, and contain a number of major revelations about claims that were previously merely suspected or entirely unknown. Here are four of the most important discoveries.
1) TerraUSD’s “stability” was a complete and conscious fabrication.
The most important new information laid out by the SEC is that in May 2021, when it experienced a small depegging from its $1 target price, Terraform and Kwon “secretly discussed with a third party that the third party would purchase massive amounts of UST to restore the $1.00 peg.” This worked, and terraUSD returned to $1. But this bailout was not discussed publicly. Instead, Kwon and others cited the May 2021 restoration of the peg as proof that terraUSD was “automatically self-heal[ing].” This narrative, which the SEC calls a complete fabrication, was key to enticing subsequent investors into the scheme.
2) Do Kwon and his allies are cashing out – big time
There have been a variety of tentative attempts to trace funds, particularly bitcoin, flowing out of Terraform Labs and affiliated entities after the collapse of the Terra system. Most recently, a South Korean news site claimed to have spotted Do Kwon cashing out about $100,000 worth of BTC in Serbia. But the SEC allegations include vastly more concrete and sweeping claims. They claim that Kwon and accomplices “transferred over 10,000 bitcoin from Terraform and Luna Foundation Guard … accounts to an un-hosted wallet.” They have, the SEC claims, converted over $100 million of that bitcoin into fiat withdrawals through a Swiss bank since June 2022. So Do Kwon may yet be living very high indeed in his Serbian spider hole.
3) The Chai “deal” was even faker than we thought.
It has long been understood that Do Kwon overstated the extent and duration of the relationship between Terra and the Chai payments platform, an e-commerce system in South Korea. Specifically, Kwon was known to have claimed Chai was using Terra for payments processing long after any such partnership had ended. But the SEC details far more proactive, in some cases incredibly elaborate, efforts to misrepresent the Chai-Terra relationship. Above all, it describes the use of a server, known internally at Terraform as the “LP Server,” which “replicated the real transactions that Chai was processing in Korean won.” In reality, according to the charges, “no Chai transactions occurred on the blockchain.”
In other words, not only did Do Kwon exaggerate the Chai-Terra relationship in his own statements, he created an entire fake server to move fake money around to simulate fake transactions, with the clear goal of deceiving investors.
4) It turns out U.S. regulation does matter.
Finally, one for fun: In an infamous 2021 interview on CoinDesk TV, anchor Christine Lee challenged Do Kwon on his apparent disregard for U.S. regulators and enforcement. He said U.S. regs were “not that interesting.” Well, it turns out that even if Do Kwon wasn’t interested in U.S. law, U.S. law is very interested in Do Kwon. As detailed in the new charging documents, Kwon and his team “engaged in conduct within the United States that constituted significant steps in furtherance” of their alleged crimes. The documents detail a healthy number of U.S. victims and argue the conduct described “had a foreseeable substantial effect within the United States,” giving ample legal standing for the SEC’s charges.
This wealth of new information is, frankly, a bit unusual in this sort of charging document, particularly in crypto-fraud cases. The SEC seems to have really done its homework here, taking advantage of its power of punishment to compel evidence and testimony from cooperators.
California launches a crypto scam tracker (LA Times)
Crypto projects told to delay new coins due to “Alameda Gap” (Protos)
Blur’s Token Airdrop Fuels Sky-High Gas Prices and Mass Ethereum Burn (Decrypt)
Starbucks Polygon NFTs Are Already Selling for Thousands (Decrypt)
zkSync Counters Polygon With ‘Mainnet’ Rollup (The Defiant)
NBA Hall of Famer Paul Pierce to pay $1.4 million in crypto charges settlement (Axios)
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