2025 Update: SEC Charges Terra Founder Do Kwon with $40 Billion Fraud, Highlights Removal of 10,000 BTC

The U.S. Securities and Exchange Commission (SEC) has officially sued Terraform Labs and its founder, Do Kwon, accusing them of orchestrating a fraud worth billions involving the TerraUSD (UST) stablecoin and LUNA cryptocurrency. The complaint reveals that Kwon transferred over 10,000 bitcoins from the Terra ecosystem to a private wallet just as UST began its catastrophic collapse in May 2022.

Key Highlights

• The SEC alleges Terraform Labs and Do Kwon engineered a multi-billion dollar securities fraud scheme.
• Terraform’s ’mAssets’ and its TerraUSD stablecoin are classified as unregistered securities by the regulator.
• The sudden crash of TerraUSD and LUNA in May 2022 wiped out nearly $18 billion in market value.

TerraUSD Collapse: Fraud, Not Decentralized Finance

The Terra ecosystem's downfall was one of the most significant crypto failures, triggering a loss of almost $18 billion and shaking investor confidence globally. TerraUSD was designed as an algorithmic stablecoin pegged 1:1 to the U.S. dollar, maintained through conversions between UST and the LUNA token by an algorithm. However, the SEC states this system was a sham, controlled by the defendants rather than automated code.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized, “Terraform’s ecosystem was neither truly decentralized nor a genuine financial product. It was a fabricated scheme propped up by an algorithmic ‘stablecoin’ whose value was manipulated by the defendants.”

Illegal Securities Sales and Investor Deception

The SEC’s lawsuit reinforces the agency’s classification of stablecoins like TerraUSD as securities. Terraform Labs and Do Kwon allegedly sold these crypto assets without registering them, violating federal securities laws. Additionally, the lawsuit highlights Kwon’s transfer of significant bitcoin holdings to cold wallets during the collapse, raising concerns over investor protection.

According to the SEC, Terraform and Kwon “offered and sold crypto securities in unregistered transactions and engaged in a fraudulent scheme causing losses exceeding $40 billion, severely impacting U.S. retail and institutional investors.” This includes sales of ‘mAssets,’ crypto derivatives mimicking stock prices of major U.S. corporations.

Bitcoin Transfers and Regulatory Pursuit

The SEC detailed how 10,000 bitcoins were moved out of the Terra and LUNA ecosystem, eventually reaching a Swiss bank. Approximately $100 million was withdrawn since June, intensifying scrutiny on Kwon’s activities. His current location remains unknown, while South Korean authorities continue their investigations.

False Promises of High Returns

Investors were lured by promises of up to 20% returns via the Anchor Protocol, a platform promoted by Terraform and Kwon. The SEC charges allege these claims were misleading and part of a strategy to build false trust before the collapse.

Gary Gensler, SEC Chair, stated, “Terraform and Do Kwon failed to provide transparent and truthful disclosures for their crypto asset securities. Their repeated false statements led to devastating investor losses.”

Implications for Stablecoins and Crypto Regulation

This lawsuit is part of a broader regulatory crackdown on cryptocurrencies. Recently, the SEC secured a $30 million settlement with Kraken, leading to the closure of its U.S. staking business. The ongoing Ripple case continues to challenge whether cryptocurrencies should be classified as securities.

Legal experts note that the SEC’s stance on TerraUSD could set a precedent, potentially classifying many stablecoins and cryptocurrencies as securities, reshaping the regulatory landscape for the entire industry.

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