Terraform Labs' Employees Probed For Intentional LUNA, UST Price Manipulation

Terraform employees will be probed by the South Korean authorities regarding the Terra ecosystem collapse in early May

By Shashank Bhardwaj

Do Kwon, co-founder and CEO of Terraform Labs at the company's office in Seoul, South Korea, April 14, 2022. Kwon is counting on the oldest cryptocurrency as a backstop for his stablecoin, which some critics liken to a ginormous Ponzi scheme; Photo: Woohae Cho / Bloomberg via Getty Images

South Korean authorities have summoned all former employees of Terraform Labs, the organisation behind Luna Classic (LUNC), formerly called LUNA, and TerraUSD (UST), to seek answers regarding the collapse of the Terra ecosystem earlier this month. According to a local report, the investigation is being carried out by the joint financial and securities crime investigation team of the Seoul Southern District Prosecutor's Office.

The joint financial and securities crime investigation unit summoned all employees of Terraform Labs who were a part of the project’s early developments in 2019 to investigate and submit related materials. The authorities are investigating the case to see any signs of intentional price manipulation and if the tokens followed the proper procedures for listing on domestic exchanges.

The investigators also claimed that the Terra token's mechanism was flawed from the start because stablecoin UST is not tied to a stable collateral or profit model. The authorities said, “At a certain point in time, there is no other way but to collapse because it cannot handle interest payments and fluctuations in value.”

The Financial Services Commission in South Korea estimates that the Terra collapse affected 2,80,000 investors. Some investors have also filed a class-action lawsuit against Terraform Labs CEO Do Kwon and Terra co-founder Shin Hyun-Seung, requesting a record of user accounts, marketing materials, and UST-related communications. They have reportedly lost up to $44 million in deposited funds. This happened after LUNC fell 99 percent and UST lost its 1:1 peg to the US dollar.

Around May 20, investigators began looking into whether Terraform Labs or its key principles ran a Ponzi scheme. One of these employees allegedly revealed that the team had reservations about the design of the TerraUSD (UST) stablecoin from the start. They also claim that they had warned Terraform Labs CEO Do Kwon that the algorithmic mechanism was not foolproof and that the stablecoin’s value could plummet sharply if it lost its dollar peg. Despite the warning, Kwon went ahead with the launch.

One of the summoned employees stated, “Even at that time, there was a warning inside that there could be a collapse at any time, but CEO Kwon Do-hyeong forced the coin to be launched.”

The news comes as Terraform Labs relaunches Terra's new chain, Terra 2.0, on May 28. Terra 2.0 was launched to revive the Terra ecosystem. The newly issued LUNA (dubbed LUNA 2 on some exchanges) was initially priced at around $18. It reached a high of $19.53 shortly after the tokens were distributed to investors before losing 71 percent of its initial value. Billy Markus, co-creator of Dogecoin, has previously stated that those who invest in Terra 2.0 'will show the world just how truly dumb crypto gamblers really are.' Amid this crisis, Binance and FTX stated that they were collaborating with the Terra team to support the upcoming airdrop to assist affected users.

Shashank is the founder of yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash

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