Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 1 of 72
`
`
`
`
`
`Kyle Roche (pro hac vice forthcoming)
`Edward Normand (pro hac vice forthcoming)
`Joseph Delich (pro hac vice forthcoming)
`Alex Potter (pro hac vice forthcoming)
`Ivy T. Ngo (SBN 249860)
`ROCHE FREEDMAN LLP
`99 Park Avenue, 19th Floor
`New York, NY 10016
`Tel.: (646) 350-0527
`kyle@rochefreedman.com
`tnormand@rochefreedman.com
`jdelich@rochefreedman.com
`apotter@rochefreedman.com
`ingo@rochefreedman.com
`
`Tibor L. Nagy, Jr. (pro hac vice forthcoming)
`Gregory N. Wolfe (pro hac vice forthcoming)
`William LaGrange (pro hac vice forthcoming)
`Heidi R. Schumann (pro hac vice forthcoming)
`Susan S. Hu (pro hac vice forthcoming)
`DONTZIN NAGY & FLEISSIG LLP
`980 Madison Avenue
`New York, NY 10075
`Tel.: (212) 717-2900
`tibor@dnfllp.com
`greg@dnfllp.com
`wlagrange@dnfllp.com
`hschumann@dnfllp.com
`shu@dnfllp.com
`
`
`Counsel for Plaintiff Jeffrey Lockhart
`
`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF CALIFORNIA
`
`
`
`JEFFREY LOCKHART, individually and on behalf of
`all others similarly situated,
`
`
`Plaintiff,
`
`
`
`
`
`v.
`
`
`BAM TRADING SERVICES INC. and BRIAN
`SHRODER,
`
`
`Defendants.
`
`
`No. ______________
`
`JURY DEMANDED
`
`CLASS ACTION COMPLAINT
`
`
`
`
`
`
`
`
`CLASS ACTION COMPLAINT
`i
`
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 2 of 72
`
`
`
`
`
`
`
`TABLE OF CONTENTS
`TABLE OF CONTENTS ................................................................................................................ ii
`INTRODUCTION ........................................................................................................................... 1
`PARTIES .......................................................................................................................................... 4
`JURISDICTION AND VENUE ...................................................................................................... 5
`FACTUAL ALLEGATIONS .......................................................................................................... 5
`I. BACKGROUND ON CRYPTO-ASSETS, CRYPTO-ASSET EXCHANGES AND BINANCE U.S. ....... 5
`A. The Blockchain And Crypto-Assets Generally ................................................................... 5
`B. Stablecoins ........................................................................................................................... 7
`C. Algorithmic Stablecoins ...................................................................................................... 8
`D. Crypto-Exchanges And Binance U.S. ................................................................................. 8
`II. THE TERRA (LUNA / UST) ECOSYSTEM ............................................................................. 10
`A. The Creation Of The Terra Ecosystem .............................................................................. 10
`B. The Interrelationship Of UST/LUNA As Part Of An Economic Scheme ......................... 12
`C. The Anchor Protocol Created By TFL Formed An Essential Part Of The UST/LUNA
`Economic Scheme ............................................................................................................. 14
`D. Despite Claiming That The Algorithm Underlying UST Was Sound, TFL Establishes
`Non-Luna Reserves To Protect The UST Peg ................................................................... 15
`E. UST Collapses, Wiping Out Billions Of Dollars In Investments ...................................... 16
`III. THE SEC HAS REPEATEDLY INSTRUCTED THAT CRYPTO-ASSETS LIKE UST AND LUNA
`ARE SECURITIES ................................................................................................................... 21
`IV. UST IS AN UNREGISTERED SECURITY ................................................................................. 22
`A. UST Is An Investment Contract ........................................................................................ 22
`1. UST Purchasers Made An Investment Of Money ......................................................... 23
`2. UST Purchasers Invested In A Common Enterprise ..................................................... 23
`3. UST Purchasers Had A Reasonable Expectation Of Profits ......................................... 25
`4. UST Purchasers Expected Profits In Reliance On The Efforts Of Others .................... 27
`B. UST Is Also An Unregistered Security Because It Is A Derivative Of LUNA, Another
`Unregistered Security ........................................................................................................ 35
`1. LUNA Purchasers Made An Investment Of Money ..................................................... 36
`2. LUNA Purchasers Invested In A Common Enterprise .................................................. 36
`3. LUNA Purchasers Had A Reasonable Expectation Of Profits ...................................... 36
`4. LUNA Purchasers Expected Profits In Reliance On The Efforts Of Others ................. 39
`
`CLASS ACTION COMPLAINT
`ii
`
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 3 of 72
`
`
`
`
`
`V. BINANCE U.S. ILLEGALLY LISTED AND SOLD UST EVEN THOUGH IT IS NOT
`REGISTERED, IN VIOLATION OF THE SECURITIES LAWS ................................................... 40
`VI. BINANCE U.S. ILLEGALLY LISTED AND SOLD THE UST SECURITY EVEN THOUGH IT IS
`NOT REGISTERED AS AN EXCHANGE IN VIOLATION OF THE SECURITIES LAWS ............. 41
`VII. BINANCE U.S. LISTED AND SOLD THE UST SECURITY EVEN THOUGH IT IS NOT
`REGISTERED AS A BROKER-DEALER IN VIOLATION OF THE SECURITIES LAWS ............. 42
`VIII.BINANCE U.S.’S ARBITRATION SCHEME IS PUNITIVELY DESIGNED TO DISCOURAGE
`RETAIL INVESTORS WITH LIMITED RESOURCES FROM FILING CLAIMS—IT IS
`UNCONSCIONABLE AND UNENFORCEABLE .......................................................................... 42
`CLASS ALLEGATIONS .............................................................................................................. 48
`CAUSES OF ACTION .................................................................................................................. 51
`PRAYER FOR RELIEF ............................................................................................................... 67
`DEMAND FOR JURY TRIAL ..................................................................................................... 69
`
`
`CLASS ACTION COMPLAINT
`iii
`
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 4 of 72
`
`
`
`
`
`Plaintiff Jeffrey Lockhart (“Plaintiff”), individually and on behalf of all others similarly
`situated, alleges the following against BAM Trading Services Inc. (“Binance U.S.”) and its CEO
`Brian Shroder (“Shroder,” and, together with Binance U.S., “Defendants”), based on personal
`knowledge, the investigation of counsel, and information and belief.
`INTRODUCTION
`1.
`Launched in September 2019 and headquartered in California, Binance U.S. is a
`crypto-asset exchange that operates a platform on which customers discover, research, buy, and sell
`digital assets. As trumpeted on its website, Binance U.S.’s business model is premised on selling
`crypto-assets throughout the United States:
`The new economy has arrived. We believe America should lead in
`crypto and we’re committed to helping people across the U.S.
`access the world of digital assets.1
`
`2.
`Unfortunately for many of these “people across the U.S.,” Binance U.S.’s
`commitment did not include a commitment to abide by U.S. federal and state securities laws.
`Between April 13, 2022, and the present (the “Class Period”), Binance U.S. used its website to buy
`from and sell Terra USD (“UST”) to investors.
`3.
`UST is an “algorithmic stablecoin” created and centrally controlled by Terraform
`Labs (“TFL”), a crypto-asset company based in Singapore that is run by its founder and CEO Kwon
`Do-hyung (“Do Kwon”). The value of UST depends on and is derivative of the value of “LUNA,”
`another crypto-asset developed and centrally controlled by TFL.
`4.
`UST was advertised and sold to investors as a “safe” asset that could be used to earn
`substantial returns, including in the form of interest. The respective prices of UST and LUNA both
`depended upon, and continue to depend upon, the efforts and success (or failure) of TFL. For
`example, the amount of interest that investors earned from UST depended directly upon the success
`(or failure) of TFL’s efforts in maintaining the Anchor Protocol (the “Anchor Protocol”), which was
`the platform created and maintained by TFL that generated UST’s interest payments.
`
`
`1 See https://www.binance.us/en/about (last visited on June 12, 2022). Unless otherwise noted, all
`emphasis in quotations has been added.
`
`
`
`
` 1
`CLASS ACTION COMPLAINT
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 5 of 72
`
`
`
`
`
`5.
`As an early supporter of and investor in TFL, Binance U.S. is intimately familiar
`with UST and LUNA. As recently as April 2022, Binance U.S. falsely advertised UST as “safe,”
`as shown in the following advertisement:
`
`
`6.
`Binance U.S also falsely advertised UST as “fiat-backed,” as shown in the following
`advertisement Binance U.S ran about the relationship between LUNA and UST:
`
`
`
`
` 2
`CLASS ACTION COMPLAINT
`
`
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 6 of 72
`
`
`
`
`
`7.
`Binance U.S. succeeded in its stated mission of “helping people across the U.S.
`access the world of digital assets” and was especially successful in the case of UST. Binance U.S.
`has a daily trading volume in crypto-assets worth hundreds of millions of dollars.
`8.
`Despite enjoying those fantastic profits, Binance U.S. plainly failed to comply with
`federal and state securities laws. Binance U.S. failed to disclose that UST is in fact a security, and
`that it is selling these securities, even though (i) there is no registration statement in effect for them,
`and (ii) Binance U.S. itself has refused to register with the U.S. Securities and Exchange
`Commission (“SEC”) either as a securities exchange or as a broker-dealer.
`9.
`Binance U.S.’s failure to comply with the securities laws, and its false
`advertisements of UST, have led to disastrous consequences for Binance U.S.’s customers: in May
`2022, in the span of just a few days, UST lost essentially all its value—a loss of approximately $18
`billion. Investors who purchased UST on Binance U.S. were wiped out, learning quickly that,
`contrary to Binance U.S.’s advertisements, UST was not “safe,” “stable,” or “fiat-backed.”
`10.
`Since the collapse of UST, Binance U.S. has removed its advertisements touting UST
`as “safe” and “fiat-backed,” effectively conceding that UST was none of those things.
`11.
`Binance U.S. has not, however, stopped selling securities created by TFL. Instead,
`having reaped hundreds of millions—if not billions—of dollars in profits by selling securities
`without bothering to comply with federal and state laws, Binance U.S.’s parent company blithely
`added insult to injury when, on May 31, 2022, it began selling Luna 2.0—a new token which, just
`like LUNA, is centrally controlled by TFL.
`12.
`The securities laws exist to protect investors. These laws were enacted, as the
`Supreme Court has explained, “[i]n the wake of the 1929 stock market crash and in response to
`reports of widespread abuses in the securities industry” and “embrace a fundamental purpose . . . to
`substitute a philosophy of full disclosure for the philosophy of caveat emptor.” Cent. Bank of
`Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 170–71 (1994) (cleaned up).
`13.
`In short, if Binance U.S. wants to enjoy the many benefits of operating in the U.S.
`market, it must comply with U.S. federal and state securities laws. Yet Binance U.S. has chosen
`
`
`
`
` 3
`CLASS ACTION COMPLAINT
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 7 of 72
`
`
`
`
`
`not to do so. Even though UST and LUNA are both securities, neither is registered with the SEC
`nor any state regulator. As a result, purchasers do not have access to the disclosures that accompany
`the issuances generally required of publicly traded securities—the precise disclosures designed to
`avoid a repeat of the 1929 stock market crash and the Great Depression that followed.
`14.
`Binance U.S. has also failed to register under federal or state law as a securities
`exchange, which it is. As SEC chair Gary Gensler recently told the Senate Banking Committee,
`Binance U.S. and other exchanges have not registered with the SEC “even though they have dozens
`of tokens that may be securities.” As to UST and LUNA, there is no doubt that they are securities.
`15.
`Binance U.S.’s failure to comply with the securities laws critically enables bad actors
`like TFL to harm investors. In fact, Binance U.S.’s business model is premised on enabling these
`bad actors: Binance U.S. profits from every trade, and therefore has a stark incentive to sell crypto-
`assets irrespective of their compliance with the securities laws. From Binance U.S.’s perspective,
`the less disclosure, the better, as more disclosure about the riskiness of crypto-assets will predictably
`lead investors to trade certain assets less and reduce transaction volume and Binance U.S.’s
`astonishing profits.
`16.
`Accordingly, because Binance U.S.’s sale of UST violates both federal and state law,
`Plaintiff, individually and on behalf of all persons or entities who transacted in UST on Binance
`U.S. during the Class Period (the “Class”), brings claims to recover damages, consideration paid
`for UST, and trading fees, together with interest thereon, as well as attorneys’ fees and costs, to the
`fullest extent permitted by law.
`
`PARTIES
`17. Plaintiff Jeffrey Lockhart is a resident of Utah. Like other members of the Class,
`Lockhart purchased UST on Binance U.S., and pursuant to contracts with Binance U.S., during the
`Class Period.
`18. Defendant BAM Trading Services Inc. is a Delaware corporation headquartered in
`Palo Alto, California, that operates under the trade name Binance U.S.
`
`
`
`
` 4
`CLASS ACTION COMPLAINT
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 8 of 72
`
`
`
`
`
`19. Defendant Brian Shroder is the CEO of Binance U.S. and was at all relevant times a
`control person over Binance U.S. Shroder is a resident of California.
`JURISDICTION AND VENUE
`20. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C.
`§ 1332(d)(2)(A), because this case is a class action where the aggregate claims of all members of
`the proposed Classes exceed $5,000,000.00, exclusive of interest and costs, and the Plaintiff and
`most members of the proposed Classes are citizens of a state different from Defendants.
`21. Subject matter jurisdiction of this Court is further proper under 28 U.S.C. § 1331
`because Plaintiff asserts claims under Sections 5 and 12(a)(1) of the Securities Act of 1933 (the
`“Securities Act”), 15 U.S.C. §§ 77e, 77l(a)(1), 77o.
`22.
`The Court has personal jurisdiction over Defendants. Both Defendants are citizens of
`California. Moreover, Defendants transacted business, maintained substantial contacts, and,
`committed overt acts in this District in furtherance of the violations of the securities laws described
`in this Complaint.
`23.
`Jurisdiction of this Court is also founded upon Section 27 of the Securities Exchange
`Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78aa(a), which provides that federal courts have
`exclusive jurisdiction over violations of the Exchange Act, including Sections 5, 15(a)(1) and 29(b),
`15 U.S.C. §§ 78e, 78o(a)(1), 78cc(b).
`24. Venue is proper in this District pursuant to 28 U.S.C. § 1391(b) and (c) and 18 U.S.C.
`§ 1965, because Defendants transact business in, are found in, and/or have agents in this District,
`and because some of the actions giving rise to this Complaint took place in this District.
`FACTUAL ALLEGATIONS
`I. BACKGROUND ON CRYPTO-ASSETS, CRYPTO-ASSET EXCHANGES AND BINANCE U.S.
`A.
`The Blockchain And Crypto-Assets Generally
`25. By way of background, this case concerns crypto-assets. Crypto-assets are digital
`assets that use a variety of cryptographic principles to secure transactions, control the creation of
`additional units, and verify their transfer.
`
`
`
`
` 5
`CLASS ACTION COMPLAINT
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 9 of 72
`
`
`
`
`
`26. Bitcoin was the world’s first major crypto-asset. Although the potential of fully
`digital assets had previously been recognized, Bitcoin’s novel architecture provided three key traits
`that enabled it to succeed: It is a secure medium of exchange, it is “mined,” and it is decentralized.
`27. This decentralization distinguishes Bitcoin from other assets. For example, the value
`of corporate stocks and bonds, regardless of their structure, is tied to the success of the issuing
`corporation. The value of government bonds is tied to the credit of the government that issues them.
`The value of a currency is tied to the issuing nation, reflecting factors like its economy, political
`stability, and the practices of its central bank. None of this is true for Bitcoin.
`28. The blockchain has become the foundational technology for crypto-assets. While
`crypto-assets vary tremendously, they generally rely on the blockchain to ensure that transactions
`are secure and non-duplicable.
`29. Control of crypto-assets is attested primarily through cryptographic keys. These
`cryptographic keys have two components: a public key and a private key. This cryptographic
`system of transfer and exchange is generally the same across most crypto-assets.
`30. To use Bitcoin as an example, the public key is used to produce the Bitcoin address.
`As with the account number of a conventional bank account, a Bitcoin address is a destination for
`transfers of Bitcoin. Bitcoin addresses are long strings of alphanumeric text, often abbreviated by
`a small group of numbers and letters, such as 1s5F or R3w9. As with a lengthy PIN or password
`for a conventional bank account, a private key allows the owner of a Bitcoin address to access his
`or her Bitcoin.
`31.
`Just as one transferring funds to a conventional bank account needs to know the
`account number for that account, those who wish to transfer Bitcoin need to know the recipient’s
`Bitcoin address. With the recipient’s address, a transferor can use his or her private key to authorize
`the transfer of Bitcoin, just as one would use a PIN or password to authorize a transfer between
`traditional bank accounts.
`32. A transfer of Bitcoin is public to the extent that anyone can see the transferor’s Bitcoin
`address, the recipient’s Bitcoin address, and the quantity of assets transferred. That is, anyone could
`
`
`
`
` 6
`CLASS ACTION COMPLAINT
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 10 of 72
`
`
`
`
`
`see that Bitcoin address 1s5F transferred 10.3 Bitcoin to Bitcoin address R3w9. The names of the
`individuals or entities that control these addresses, on the other hand, are neither recorded on the
`blockchain nor are they accessible to the public.
`B.
`Stablecoins
`33. The advent of Bitcoin in 2009 introduced the promise of a decentralized and
`programmable form of digital money. The value of many crypto-assets, however, is highly volatile,
`which can be an undesirable feature for a medium of the exchange.
`34. A “stablecoin,” as the name implies, is a digital asset whose value is supposed to be
`stable, not volatile. A stablecoin is designed to maintain a consistent value relative to one or more
`assets, such as a fiat currency (e.g., the U.S. dollar, the Euro, the Japanese yen etc.) or debt
`obligations (e.g., short-dated U.S. government obligations). Potentially unlike the underlying asset
`(e.g., if that asset is a debt obligation), the stablecoin in theory can be transferred between parties
`across borders instantaneously with minimal transaction cost.
`35. One of the first stablecoins, Tether (also known as “USDT"), illustrates that the
`promises of the backers of stablecoins do not always match reality. Launched in 2014, Tether
`Holdings Ltd. (the company that issues USDT) originally claimed that each USDT minted would
`“be backed one-to-one by a fully auditable reserve of [U.S.] dollars.” Ostensibly, a USDT holder
`could exchange his or her USDT for an equal number of U.S. dollars.
`36. Regulators and the investing public, however, have expressed significant concern over
`whether USDT is truly backed by an equal number of dollars. Indeed, in 2021, the Commodities
`Futures Trading Commission ordered Tether Holdings to pay $41 million in penalties because “from
`at least June 1, 2016 to February 25, 2019, [the company] misrepresented to customers and the
`market that [it] maintained sufficient U.S. dollar reserves to back every USDT.”2
`37.
` There are now many stablecoins in circulation that purport to be backed by different
`types of assets. As of the time of this filing, the market capitalization of all stablecoins is more than
`$152 billion.
`
`
`2 https://www.cftc.gov/PressRoom/PressReleases/8450-21.
`
` 7
`CLASS ACTION COMPLAINT
`
`
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 11 of 72
`
`
`
`
`
`C.
`Algorithmic Stablecoins
`38. Whereas most traditional stablecoins are backed by non-digital assets, “algorithmic
`stablecoins” are a special type of stablecoin that typically consist of an arrangement with a second
`digital asset, with the relationship between the two tokens managed through an algorithm in such a
`way that the stablecoin should remain pegged to its reference asset (such as the U.S. dollar).
`39. For example, a given algorithmic stablecoin may purport to be worth $1 dollar. The
`issuer of the algorithmic stablecoin, however, does not itself hold dollars for which the algorithmic
`stablecoin holders can exchange the stablecoin. Instead, the algorithmic stablecoin’s value is kept
`pegged to the dollar by reference to a second digital asset. At a high level, the algorithm underlying
`the algorithmic stablecoin monitors the price of the underlying digital asset and constantly acts (by
`increasing or decreasing supply) to keep the price of the stablecoin pegged to the dollar. The
`algorithm’s promise, therefore, is to keep the price stable.
`40.
`In the case of the algorithmic stablecoin UST—the subject of this lawsuit—TFL
`purported to keep the value of UST pegged to $1 stabilized through a system of supply control and
`profit-taking arbitrage incentives related to LUNA.
`D.
`Crypto-Exchanges And Binance U.S.
`41.
`Just as traditional stock exchanges enable investors to trade stocks, crypto-exchanges
`enable investors to trade crypto-assets.
`42. At a high level, there are two primary types of crypto-exchange: decentralized
`exchanges and centralized exchanges. Decentralized exchanges may use the blockchain itself to
`match and execute transactions among traders. Generally, for decentralized exchanges, there is no
`intermediary individual or corporation that matches or clears transactions; instead, a decentralized
`exchange uses a blockchain technology called a “smart contract” to automatically facilitate trading.
`While different decentralized exchanges use different approaches, what they have in common is that
`the crypto-assets exchanged are transferred between individual accounts. Thus, if Angela
`exchanges one Bitcoin for 10 Ethereum using a decentralized exchange, her one Bitcoin will be sent
`to Brian, another user on the platform, and Brian’s 10 Ethereum will be sent to Angela.
`
`
`
`
` 8
`CLASS ACTION COMPLAINT
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 12 of 72
`
`
`
`
`
`43. These decentralized exchanges resemble Craigslist in their operation. Just like a
`purchase of a collectible baseball card on Craigslist involves one user sending money and the other
`sending the card, so too do transactions on decentralized exchanges involve customers sending each
`other the goods being transacted. These decentralized exchanges, like Craigslist, do not own or
`hold the assets in question—they simply provide a platform for exchanges between users, along
`with certain features designed to facilitate trading (e.g., Craigslist’s creation and maintenance of
`message boards organized by product type or a decentralized exchange’s smart contracts), possibly
`in exchange for advertising revenue or a transaction fee.
`44. Binance U.S. is an example of a centralized exchange for crypto-assets. Generally, to
`trade on Binance U.S., a customer creates an account. Binance U.S. then provides the customer
`with a deposit address that the exchange controls. When the customer deposits crypto-assets into
`the deposit address, Binance U.S. credits the customer’s trading account with the corresponding
`crypto-asset and transfers the crypto-asset into one of Binance U.S.’s internal addresses for storage.
`45. The trades conducted within Binance U.S., however, do not involve the transfer of
`any assets between users. Instead, it is Binance U.S. that faces both the buyer and the seller. Thus,
`if Angela wishes to trade one Bitcoin for 10 Ethereum on Binance U.S., Binance U.S. will update
`its internal records to debit Angela’s account one Bitcoin and credit the account with 10 Ethereum;
`no actual crypto-assets are moved on the blockchain. Nor is there any sense in which Angela’s
`Bitcoin is transferred to anyone other than Binance U.S.: while Binance U.S. may use other traders’
`orders to determine the relative prices of crypto-assets and the rate at which they are exchanged, the
`only actual transactions that occur are between (a) the buyer and Binance U.S. and (b) the seller and
`Binance U.S. Accordingly, the buyer and seller are not in privity with one another. When a user
`wants to withdraw crypto-assets from Binance U.S. or another centralized exchange, she tells the
`exchange the address into which she would like her crypto-assets transferred. The exchange then
`debits the user’s account and transfers a corresponding amount of crypto-asset from the exchange’s
`reserves to that address. The withdrawn assets come directly from the centralized exchange.
`
`
`
`
` 9
`CLASS ACTION COMPLAINT
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 13 of 72
`
`
`
`
`
`46. As a centralized exchange, Binance U.S. places all deposited assets into a centralized
`wallet and reflects transactions on its platform only through internal updates to each customer’s
`account. The following table shows the fees charged by Binance U.S. based on USD transaction
`volume:
`
`
`
`II. THE TERRA (LUNA / UST) ECOSYSTEM
`A.
`The Creation Of The Terra Ecosystem
`47. UST and LUNA are crypto-assets that exist as part of a broader Terra ecosystem that
`was centrally developed by TFL and, among others, TFL’s founders Do Kwon and Daniel Shin.
`The Terra ecosystem has come to encompass numerous “decentralized applications” or “dApps”3
`and protocols,4 such as the Anchor Protocol—a lending and borrowing platform—and the Mirror
`Protocol—a platform for trading “mirrored” or synthetic assets, including U.S. stocks traded on
`major U.S. exchanges (the Mirror Protocol is the subject of an ongoing SEC investigation).
`
`
`3 A “decentralized application” is a digital application that runs on a blockchain network.
`4 A “protocol” is essentially a set of rules or foundational layer of code that governs how a system
`functions.
`
`
`
` 10
`
`CLASS ACTION COMPLAINT
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 14 of 72
`
`
`
`
`
`1
`2
`3
`4
`5
`6
`7
`8
`9
`10
`11
`12
`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`48. Do Kwon is a 30-year old South Korean computer science graduate of Stanford
`University. He worked at Microsoft and Apple before becoming what the New York Times calls a
`“trash-talking crypto founder” responsible for the ultimate crash of UST and LUNA.5 Do Kwon
`earned that notoriety through taunts aimed at his critics such as: “I don’t debate the poor.” In
`addition to LUNA/UST, Do Kwon is also responsible for the launch of another failed algorithmic
`stablecoin project, Basis Cash.
`49. Shin is a graduate from the University of Pennsylvania’s Wharton School and was
`described by TFL as “one of the best known entrepreneurs and investors in East Asia.”6 Shin
`eventually left TFL.
`50.
` The first step in the tokenization of the Terra ecosystem was the launch of LUNA,
`the “native” digital asset of the Terra blockchain. Do Kwon has called LUNA his greatest invention.
`51. TFL has described LUNA “as the native staking asset from which the family of Terra
`stablecoins derive their stability, utility, and value, acts both as collateral for the entire Terra
`economy and as a staking token that secures the PoS network. Luna can be held and traded as a
`normal crypto-asset but can also be staked to accrue rewards in the network generated from
`transaction fees. Luna can also be used to make and vote on governance proposals.”
`52. TFL has advertised LUNA as “backed by” by the parent company of Binance U.S.,
`which Plaintiff refers to as “Binance-Asia.” Binance-Asia invested in TFL and received LUNA
`tokens in exchange, the value of which eventually reached $1.6 billion.
`53.
`In April 2019, Do Kwon and several co-authors released the promotional “Terra
`whitepaper,” which describes the plan to create “Terra Money” in the form of an algorithmic
`stablecoin that, when pegged to the U.S. dollar, would become UST.
`54.
`In September 2020, Do Kwon announced the launch of UST through the secondary
`crypto-asset exchange Bittrex Global. Do Kwon touted UST as “the first decentralized stablecoin
`that is scalable, yield bearing and interchain.” Trumpeting the growth potential of UST, Do Kwon
`
`
`5 https://www.nytimes.com/2022/05/18/technology/terra-luna-cryptocurrency-do-kwon.html.
`6 https://kando.tech/person/daniel-shin.
`
`
`
` 11
`
`CLASS ACTION COMPLAINT
`
`

`

`Case 3:22-cv-03461 Document 1 Filed 06/13/22 Page 15 of 72
`
`
`
`
`
`compared UST to a different Terra stablecoin pegged to the South Korean Won, observing that that
`stablecoin “has been exploding in growth and adoption in Korea, and is today the most actively
`adopted stablecoin by usership.” Do Kwon explained that UST was a “yield bearing” asset and
`promoted “the upcoming launch of Anchor, a savings protocol offering stable yield on Terra
`stablecoins” such that “[UST] will soon be the first censorship-resistant dollar to offer a savings
`experience competitive with the traditional savings account through Anchor.”
`B.
`The Interrelationship Of UST/LUNA As Part Of An Economic Scheme
`55. UST and LUNA are part of a single economic scheme or arrangement. In publicly
`available informational videos that have been viewed hundreds of thousands of times, TFL describes
`the way that UST and LUNA work together as a series of understandings, transactions, and
`contracts. According to TFL, UST is
`
`
`built on Terra’s blockchain. The price of one UST is determined by
`how many people want it, and by how much UST is available. Let’s
`imagine the entire Terra economy as a pool. The size of the pool is
`determined by the total supply of UST. If more people want UST
`the tide rises, and if less people want UST the tid