US Justice Department launched an investigation into the TerraUSD collapse

Updated: 18 May 2023

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Last year, in May 2022, the Terra blockchain collapsed. Its native cryptocurrency, LUNA, lost its value which sank to nearly $0. The same happened to the project’s stablecoin, TerraUSD. The entire event has sent a massive shockwave throughout the crypto industry, further strengthening the crypto winter that started several months earlier and likely prolonging it. As a consequence, this led to the crash of a number of other businesses, including one of the largest crypto exchanges in the world, FTX.

The project was investigated by multiple authorities immediately, and its founder, Do Kwon, went into hiding not long after. Months passed, and eventually, the year ended with the matter still unresolved. Then, in February 2023, the US SEC decided to join the regulators that have filed a lawsuit against Do Kwon, who is still at large, as well as Terraform Labs. Now, in March, the US Justice Department decided to launch its own investigation, and it is currently probing the incident in which TerraUSD collapsed.

Founder of Terraform Labs @stablekwon is under investigation by US Justice Department for #TerraClassicUSD stablecoin collapse

Lawsuit by SEC also filed against Kwon & Terraform Labs. Justice Dept probing Chai-Terra blockchain relationship while SEC claims Kwon misled investors. pic.twitter.com/30pdTHwPBk

— LaCryptoLycus🐺 (@CryptoLycus) March 14, 2023

US JD has started its investigation

Justice Department is raising the possibility of criminal charges being filed against Do Kwon, according to sources familiar with the matter. So far, US authorities — including the Southern District of New York and the FBI — have interviewed Terraform Labs’ former employees while also seeking to interview others.

The SEC filed its own lawsuit because it is firmly convinced that Do Kwon and Terraform mislead their investors, keeping quiet about the risks associated with TerraUSD. The regulator said that “Terraform and Kwon marketed the crypto asset securities to investors in the United States and abroad, repeatedly claiming that the tokens would increase in value and touting Defendants’ managerial and entrepreneurial efforts to do so.” The JD is now investigating similar aspects of the incident.

Singapore launched the investigation after the U.S. Securities and Exchange Commission (SEC) indicted Kwon and Terraform Labs for fraud last month.

— Blockmedia (@eBlockmedia) March 7, 2023

Apart from that, Manhattan-based federal prosecutors have started examining discussions in the chat group associated with the project, as well as several prominent trading firms, including FTX affiliate Alameda Research, Jump Trading Group, and Jane Street Group.

According to insiders, the authorities are searching for a potential bailout of TerraUSD. Allegedly, such a bailout never took place. But, as the investigation is ongoing, the investigators want to determine whether market manipulation took place and if so, whether the other mentioned companies were somehow involved.

A domino effect that caused a series of collapses

Following the collapse of the blockchain, both tokens collapsed as well. As mentioned, this has had a massive impact on the world of digital assets, leading to the failures of FTX and the mentioned Alameda Research — whose executives, with the exception of Sam Bankman-Fried, later pleaded guilty to charges involving fraud. Apart from them, other major entities that crashed in the aftermath of these collapses include the hedge fund Three Arrows Capital as well as Voyager Digital.

The DoJ previously also voiced its suspicions that another unnamed company had bailed out TerraUSD. According to the DoJ, there is a possibility that the entity in question was Jump and that it bailed out TerraUSD once before in an indictment against Bankman-Fried. However, for the time being, the investigation is ongoing, and no official conclusions have been published by the authorities at this time.