Binance.US Accused of Misleading Investors in Class-Action Lawsuit Over Terra

“Those of you waiting for the earth to become unstable – I'm afraid you will be waiting until the age of men expires.”

These confident words tweeted by Terra blockchain founder Do Kwon sought to convince crypto investors to put their trust (and money) into terraUSD (UST), a stablecoin that Kwon promised would always stay priced at exactly $1. Unfortunately, Kwon’s confidence was not enough to save UST and the rest of Terra as his entire project dropped to zero.

Now, over 2,000 Terra investors say false marketing is what caused them to lose their money.

In a class-action lawsuit filed Monday in The United States District Court for the Northern District of California, centralized cryptocurrency exchange Binance.US has been accused of misleading investors surrounding the Terra blockchain ecosystem.

The suit marks the first major U.S.-based court filing relating to Terra, whose UST and LUNC tokens wiped out around $40 billion in investor funds when they crashed to pennies last month.

The suit, which was filled by U.S.-based law firm Roche Freedman LLP, alleges that Binance.US marketed Terra’s dollar-based UST as more stable than it actually was. According to the suit, when UST and its sister token luna classic (LUNC) crashed to zero in May, thousands of unsuspecting retail investors were caught completely off guard. Misleading advertising is what the suit says is to blame for those losses.

The lawsuit also alleges that Binance.US is not registered as a broker-deal or an exchange, which may be in violation of securities law after it listed what might be an unregistered security in UST.

The suit is also aimed at Binance.US CEO Brian Shroder.

In a statement provided to CoinDesk, Kyle Roche, one of Roche Freedman's founding partners, said “Binance U.S. recklessly listed and promoted UST as a ‘safe’ stablecoin to those seeking to avoid the volatility of other cryptocurrencies. They, as well as other exchanges that listed UST, should be held accountable."

Binance.US disputes the allegations made in the lawsuit. "Binance.US is registered by FinCEN and adheres to all applicable regulations. These assertions are without merit and we will defend ourselves vigorously," the company said in a statement to CoinDesk.

While a successful suit would send chills down the spines of some decentralized finance (DeFi) founders and centralized exchange CEOs, it would embolden DeFi advocates who think decentralized tools for participating in crypto finance – rather than centralized exchanges – are necessary to avoid government censorship and burdensome regulations moving forward.

The Terra crash

Along with seasoned big-money backers like Hashed and Jump Crypto, the Terra collapse drained the wallets of thousands of unsuspecting retail investors. In the days following Terra’s decline, its largest Reddit forum was filled with accounts of suicides (and above them, extensive resources on how those struggling could find help).

The forum also featured criticism of Terra’s highly vocal co-founder – Do Kwon. Kwon, according to some Terra watchers, is primarily to blame for hyping up the promise that UST would always sit safely at $1. Just as he was making brash assurances around the security of UST, Kwon was building a system that onlookers like Kevin Zhou of crypto hedge fund Galois Capital said was built to fail.

Upon these questionable foundations, Kwon nonetheless promoted the safety of UST (and its luna sister token) ceaselessly across social media – loudly dismissing critics like Zhou. Even as UST first began to wobble off of its $1 peg (just a few days before it ultimately crashed), Kwon tweeted “Anon, you could listen to CT influensooors about UST depegging for the 69th time, Or you could remember they’re all now poor, and go for a run instead.”

Deriding critics with adjectives like “poor” was not out of character for Kwon, but the founder was unusually silent for several days as his ecosystem eventually cratered.

The question now is whether Kwon or his company will ultimately join Binance.US in facing potential legal penalties for their role in promoting Terra.

A government panel is already awaiting Kwon in his native South Korea, and the U.S. Securities and Exchange Commission (SEC) has been nipping at Terraform Labs’ heels for years. Kwon has reportedly been living in Singapore for the last several months, but today’s lawsuit adds to the evidence that Kwon will soon face legal battles around the world.

Even so, Kwon’s Terraform Labs – which held a central role in creating the Terra ecosystem – has yet to face a class-action lawsuit like this one.

Apparently, it won’t have to wait for long.

According to FatMan – a member of the Terra Research Forum and a vocal critic of Terra with a large Twitter following – a suit against Terraform Labs is also coming, and it is likely to look similar to this one.

FatMan helped orchestrate Monday’s suit by organizing a group of 2,000 aggrieved Terra investors who allege they were misled by a number of entities.

FatMan told CoinDesk: "We will begin by filing mass arbitrations & class actions against the various exchanges. I will be helping them with some outreach (connecting to victims) but I have no real special role in the exchange suits. Then soon after we will file against TFL/Jump."

On the Binance.US suit, they added: "Centralized exchanges have become highly accessible to the general public – even my parents use them – and as such, it is virtually a moral imperative for them to uphold a high standard of truth and risk disclosure. Telling people an asset is fiat-backed when it is not is fraudulent.

"Telling people a coin is 1:1 pegged to the US dollar and selling it alongside USDC and USDT without the relevant risk disclosures is scummy. People were roped in with siren calls of 'safe, stable yields' - but no attempt to help them actually understand what they were buying was made. This is morally unconscionable, and, in my opinion, it should be illegal."

Looking ahead

Should the suit succeed, it will prove monumental in defining the legal status of DeFi, which has thus far avoided clear regulations or heavy government oversight.

Moreover, the fact that today’s suit seeks to hold a centralized exchange culpable for a token’s advertising – rather than the organization that launched it – will hold wide implications for the shape of DeFi moving forward. It may portend a world where centralized exchanges are forced to more closely vet the tokens they support on their platforms.

Read more: Why Terra’s Fall Offers a Unique Opportunity to Create a Better Stablecoin Environment

CORRECTION (June 13, 10:20 UTC): Corrects 10th paragraph under "The Terra crash" sub-header to say FatMan organized Terra investors against various entities, not just Binance.US.

UPDATE (June 13, 16:26 UTC): Adds statement from Binance.US.

UPDATE (June 13, 17:45 UTC): Adds statement from Kyle Roche