According to a September 22 filing, the co-founders of the now-defunct Terra blockchain project allegedly plotted to create fraudulent transactions during the project’s development.
There, the Securities and Exchange Commission (SEC) noted that Terraform Labs partnered with a payment app called Chai, ostensibly so the latter app could handle transactions on-chain. The SEC alleges that the leaders “faked Chai payments on the Terraform blockchain” when in fact Chai payments were made traditionally.
While Terraform Labs was led by co-founder and then-CEO Do Kwon, Chai was founded and led by another Terraform Labs co-founder, Daniel Shin.
In chat logs from 2019, Shin and Kwon discussed how spoofed transactions could support their operations. Shin started by asking Kwon when participants would begin striking and when token airdrops would end.
Kwon suggested that early activities would be faked when he replied:
“I can just create fake transactions that look real, which generates fees… and we can phase that out as Chai grows.”
Shin then expressed concern that end users would find out that the activity in question was spoofed. About that criticism, Kwon said:
“All power to those who can prove it’s fake… because I’ll do my best to make it invisible. I won’t tell if you don’t.”
Shin in turn agreed to test this plan on a small scale. Kwon concluded, “Okay.”
It is unclear to what extent the co-founders actually falsified data in practice, as the relationship between Terraform Labs and Chai ended in 2020. However, the partnership allegedly lasted long enough to lead to a highly effective deception: the SEC alleges that investors transferred “hundreds of millions of dollars” of LUNA and other tokens under the belief that the relevant Chai transactions were executed on Terra’s blockchain.
SEC wants Kwon brought to the US
The SEC included the above chat logs as part of a filing seeking to have Kwon deposed and testify in a securities case.
If the SEC’s request is successful, Kwon will be extradited from Montenegro to the United States, where he was recently sentenced to prison for falsifying travel documents. On September 27, defense attorneys attempted to challenge the SEC’s request, stating that it is “impossible” to have Kwon leave Montenegro.
Defense attorneys also claimed at the time that the above chat logs discuss transactions related to staking rather than transactions related to the Chai partnership.
The SEC originally filed charges against Terraform Labs, Kwon and other entities in February, alleging unregistered securities sales and fraud.
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