US SEC Investigating Do Kwon's Terraform Labs and UST Collapse: Report

The U.S. Securities and Exchange Commission (SEC) is reportedly investigating Terraform Labs and the collapse of algorithmic stablecoin terrausd (UST). “SEC enforcement attorneys are investigating whether Terraform Labs broke securities and investment product rules.”

SEC Launches Investigation of Terraform Labs and UST

The U.S. SEC is investigating Terraform Labs and its algorithmic stablecoin terrausd (UST), Bloomberg reported Thursday, citing people familiar with the matter.

UST lost its peg to the U.S. dollar in early May. The stablecoin quickly lost its value and collapsed alongside cryptocurrency terra (LUNA). Both coins were created by Terraform Labs CEO Do Kwon, who has since launched LUNA 2.0.

The SEC is investigating whether the marketing of UST before it crashed violated federal investor protection regulations, the publication conveyed. Specifically, SEC enforcement attorneys are investigating whether Terraform Labs broke securities and investment product rules.

The implosion of the two cryptocurrencies prompted lawmakers in various countries to look into regulating stablecoins. In the U.S., Treasury Secretary Janet Yellen said the regulation of stablecoins is urgent. SEC Chairman Gary Gensler subsequently said that a lot of crypto tokens will fail.

Kwon is already facing scrutiny from the SEC over the Mirror Protocol. In a ruling Wednesday, Terraform Labs and CEO Kwon were ordered to comply with the SEC’s subpoenas filed in February. Kwon’s appeal has been rejected by the court.

Regarding the investigation by the SEC, the Singapore-based Terraform Labs told the news outlet that it was not aware of an SEC investigation into UST. “We are not aware of any SEC probes into Terrausd at this time – we’ve received no such communication from the SEC and are aware of no new investigation outside of that involving Mirror Protocol,” Kwon said.

Legal experts do not expect Kwon to face criminal charges in the U.S. They said it’s more likely for him to face civil charges and regulatory penalties.

In South Korea, where Kwon is from, the government has launched an investigation into the collapse of terra and terrausd. A class-action lawsuit has also been filed against Terraform Labs, Kwon, and another co-founder. Furthermore, Seoul police are investigating whether Terraform Labs staff embezzled the company’s bitcoin.

Terraform Labs used to have a subsidiary in South Korea. However, Kwon dissolved it days before the collapse of UST and LUNA.