SEC Lawsuit Takeaways, LUNC Trading Fees Burn Update, Tokens Roundup and More

Coming just over nine months since the collapse of Terra, the US Securities and Exchange Commission (SEC) last week brought forward charges against Terraform Labs, the development firm behind the ecosystem, and the project's key developer, Do Kwon. The late Thursday allegations, which include “defrauding investors in a multibillion-dollar” scheme, add to a domestic probe by South Korean prosecutors around the events that led to as well as Kwon's role in Terra's crash. Outside the US and South Korea, the Terra co-founder is under the radar of Interpol. Here are the main revelations from the SEC complaint and other latest updates around Terra:

SEC lawsuit

The markets regulator claimed that Kwon sold a series of “inter-connected assets,” which it defined as unregistered securities. Prior to Thursday's development, only domestic regulators in South Korea appeared to be actively pursuing Kwon. Justifying the interest in the matter, the SEC said the Stanford alumni spurned forewarnings about the company's offerings in the US which eventually proved to be his undoing.

Misleading investors on the stability of offerings

The watchdog agency set forth that Kwon misrepresented the tokenomics around TerraUSD (UST), the protocol's algorithmic stablecoin offering. Terra's ecosystem featured two primary related tokens, the native token, previously LUNA but rebranded to LUNC, and TerraUSD, an algorithmic stablecoin pegged to the US dollar. Kwon implied that the ecosystem attained self-balancing by keeping the supply of both tokens in check. The SEC explicitly labeled this peg mechanism a fabrication. Concerns around this model surfaced prior to its eventual collapse when TerraUSD (UST) briefly lost its peg in May 2021.

The event raised concerns and bred uncertainty among holders of the then LUNA token. In another occurrence a year later, the stablecoin lost its peg and despite efforts to restore parity and stabilize the ecosystem, the Terra tokens continuously hemorrhaged.

Crypto total market capital chart. Source: TradingView

The majority of market participants lost confidence leading to a massive dump and consequent slump in the price of LUNA whose market capital fell below $1 billion. The broader crypto sector suffered a huge retracement as well as the total market capital shrunk to $1.2 trillion – a level it is yet to reclaim.

Market gains and losses alongside major events. Source: Chainalysis

In addition to retail traders, several crypto companies took massive hits owing to their exposure, including crypto lending firm Celsius and Three Arrows Capital, which collapsed within a month.

“This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws, but it also demonstrates the strength and commitment of the SEC's dedicated public servants,” SEC Chair Gary Gensler remarked on the action.

The filing faulted Kwon and his accomplices for plotting to benefit from a transaction of 10,000 BTC from the non-profit backing organization, the Luna Foundation Guard. The Gensler-led commission noted that the co-founder and others involved in the scheme have cashed out $100 million in fiat withdrawals from the Bitcoin stash through a Swiss bank in the last six months.

Fake ties with Chai

Kwon is also accused of misreporting the company's partnership with payments app Chai, whose founder Daniel Shin is the other co-founder of Terraform not named in the complaint. Notably, these allegations are similar to those made by Terra Research Forum's, FatManTerra, in June.

“Do Kwon went around on podcasts telling people Chai x Terra was being used by major Korean merchants, and nobody called him out on the fact that Chai had no users and no real merchants at that time. It was a scheme for TFL to launder money out,” the self-proclaimed whistleblower wrote at the time.

The 55-page document to the Southern District of New York disputed previous accounts of the association between Chai and Terraform. The complaint clarified that the relationship between the firms was only signed off on paper and not actualized. The SEC accused Kwon and the parent company of replicating the transactions processed by Chai in the local currency (Korean won) to simulate that they had been processed on the chain.

“Chai payments did not use the Terraform blockchain to process and settle payments. Rather, Defendants deceptively replicated Chai payments onto the Terraform blockchain, in order to make it appear that they were occurring on the Terraform blockchain, when, in fact, Chai payments were made through traditional means,” the SEC divulged in the lawsuit.

This complete sham, as no Chai transactions occurred on the blockchain in real life, allowed Terra to attract investors.

Jump Crypto's association as a market maker

The SEC referred to unnamed parties involved in some of the fraudulent operations orchestrated by Kwon. Some of the cited entities took part unbeknownst to them, the treachery in play. In one instance, Kwon oversaw a secret bailout plan involving an unnamed party, since identified as Jump Crypto, to buy a significant volume of UST, covertly overcoming the depeg and burying a market sell-off. Kwon sold this recovery incident as a self-healing autonomous process that didn't require human interaction with the system.

LUNC price and market capital chart

The regulator cited an instance where the VC firm scooped the tokens for as little as 40 cents when its spot price was around $90. The Chicago-based Web3 infrastructure development firm is said to have booked just over $ 1.2 billion in profits by purchasing LUNA tokens at a discounted price – a trade that cost $62 million. Its executives were also active participants in several of Terra's governance and investment initiatives, notable among them contribution towards Terra's cross-chain bridge and capital raise to fund the Luna Foundation Guard. The LFG was tasked with overseeing Terra's multi-billion-dollar bitcoin reserve treasury, which became depleted after failed efforts to reattain the dollar peg.

Setting a precedent

Remarking on the lawsuit, Delphi Lab's Gabriel Shapiro opined that the case's outcome would define the regulator's approach if it decides to take action against other stablecoins in the market. Last week, the SEC threatened to go after Paxos, the issuer of BUSD stablecoin.

“You can expect the argument for UST being a security to be a roadmap for how the SEC goes after other stablecoins they will allege that integration, promotion, marketing, commercial deals etc building the stablecoin ecosystems are ‘efforts of others' that are ‘reasonably expected' and can lead to profits in connection with the stables,” he wrote.

Hunt for Kwon

Still, Kwon's actual residing location has remained vague with reports suggesting the disgraced developer was last thought to be in Serbia.

Location still unknown; prosecutors speculate Serbia

Terraform Labs founder Do Kwon has been missing since South Korean prosecutors asked Interpol to issue a Red Notice against the digital asset creator, alleging violations of capital markets laws and fraud. While the country also invalidated his passport, Do Kwon left Singapore, where he was initially, before he apparently flew to Dubai while in transit to an unknown location and has not been seen since.

Reports by South Korean news outlet Chosun Media said in December that national intelligence was aware that Kwon resides in Serbia, probably due to the lack of an extradition treaty between the two countries. At the time, the outlet said South Korean officials were seeking to collaborate with Serbia to bring back the former crypto entrepreneur to face charges.

South Korean prosecutors say Serbia is willing to cooperate

A South Korean delegation of officials from the prosecutors' office and a senior justice ministry official traveled to Serbia intending to locate the elusive crypto-fugitive. A fortnight ago, the Seoul prosecutors' office verified the reports of the delegation's visit to the nation, and the local authorities indicated an intent to assist. The investigative team was comprised of the Director of Financial and Securities Crimes within the jurisdiction of the Seoul Southern District Prosecutor's Office, Dan Sung-han, and the Director of the International Criminal Affairs Division within the Ministry of Justice, Lee Ji-hyung.

Seoul prosecutors have been seeking legal action against Kwon and former members of Terraform Labs, charging them with fraud and violating capital markets law, though the accused have repeatedly asserted that the charges are unfounded and politically motivated. Some legal practitioners in South Korea have questioned the relevance of the charges brought against Kwon under the Capital Markets Act as it did not cover cryptocurrencies the last time it was revised in 2006.

LUNC spot and margin trading fees burn

Earlier this month, the Terra Classic chain completed the upgrade from v1.0.4 to v.1.0.5 at block height 11,543,150 – the latter reinstating Binance's support to help burn the surplus supply of tokens. Binance announced, as part of its plans to support the project, that it would burn 100% of the LUNC trade fee collected on its spot trading platform. In December, the exchange adjusted the figure to 50% following controversial proposal developments.

“This is the most important change we are making in the version upgrade. This is a state breaking fix made to the upgrade keeper that stores the current version map of the modules in the applications memory.  […] This code initializes the version map, so that future upgrades can utilize the proper upgrade procedures,” a section of the releases notes detailed.

The proposals in question (Proposal 10983 & 11111) sought to remint 50% of the burnt supply to fund a community pool. The move saw resistance from the community, with Binance communicating that it would temporarily suspend LUNC trading fees burning until March this year. Pushback from the community prompted the developers to discard the reminting plans as part of Binance's terms to keep the collaboration going.

“Binance will continue to work with the community to support the implementation of this new plan, and if for any reason this can't be done, Binance will consider withdrawing the burn contribution going forward.”

The exchange also asked the Terra foundation to create a new burn wallet address that doesn't allow for reminting where it will send spot and margin trading fees charged on its platforms. Binance has since proposed re-introducing the 100% LUNC fee burn mechanism after the Feb 15 state-breaking upgrade.

LUNC burn transactions in February. Source: LUNC Burner

Without Binance's contributions, the Terra Classic community burned 8.513 million tokens between Feb 12 and Feb 19, bringing the month's total as of Feb 20 to almost 28 million tokens. In comparison, the community managed over 204.19 million tokens in LUNC burn transactions across January and 29.16 billion across Q4 in 2022.

Price action update

Though the May crash left its native token Terra Classic (LUNC), trading barely a cent, the LUNC community has committed to turning things around. Among the areas of target for the rebirthed ecosystem is decentralization which backers have tried to achieve by making Terra more community-driven. There are currently approximately 5.912 trillion tokens in circulation. The community intends to burn billions of LUNC this year to reduce this bloated supply.

LUNA/USD chart

Terra Classic (LUNC), the native token of the original chain, and Terra (LUNA) have moved in line with Bitcoin and most of the rest of the alts. Earlier this month, both posted their year-to-date market capital highs – $1.23 billion and 491 million, respectively. Thus far, more than 37.462 billion LUNC tokens have been sent to the burn address. This figure, however, barely makes up 1% of the total LUNC supply implying the community still has a long way to go in decreasing the supply. Overall, the community anticipates that removing a significant share of the current circulation supply and more utility could help bring the token to $0.0002 in the coming months and the $1 target in the long run.