Is Terra Crypto a Pyramid Scheme? Bill Ackman Thinks So

Rachel Curry - Author
By

May 19 2022, Published 1:03 p.m. ET

The depegging of Terra’s stablecoins (LUNA and UST) has caused chaos in the cryptocurrency arena. Terraform Labs founder Do Kwon has been on the receiving end of much of the frustration (a man who reportedly lost $2.37 million in LUNA trespassed at Kwon’s home). Now, people are looking critically at Terra’s cult-like atmosphere that once reigned supreme — even likening it to a pyramid scheme.

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Billionaire investor Bill Ackman says Terra is a “crypto version of a pyramid scheme.” Is Ackman on the money or is there more to the story?

Bill Ackman said that Terra is a crypto-style pyramid scheme.

Terra’s stablecoins are what’s known as “algorithmic stablecoins.” This means they aren't secured by fiat currency (such as the U.S. dollar), other crypto assets, or physical assets. Instead, algorithms and smart contracts manage the token’s price to keep it pegged to a particular asset.

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Ackman criticized the Terra algorithm, which he likened to a pyramid scheme. He wrote on Twitter, “Investors were promised 20 [percent] returns backed by a token whose value is driven only by demand from new investors in the token. There is no fundamental underlying business.”

“Luna appreciated by attracting more followers and by limiting the supply of tokens through a vesting schedule,” Ackman added to his explanation. “It collapsed once the supply of sellers of Luna overwhelmed the buyers.”

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Does Ackman’s claim that Terra is a pyramid scheme make sense?

Ackman was sued in 2021 for a subpar SPAC that cost investors billions of dollars. Even Ackman lost 80 percent of his investment in the deal, but he arguably has more wiggle room than the average retail investor. Despite this hiccup, Ackman’s analysis of Terra as a potential crypto-style pyramid scheme does hold water.

In 2020, Nevin Freeman (co-founder of crypto-backed stablecoin Reserve) warned crypto enthusiasts about Terra’s operation. “If there’s an algorithmic stablecoin that has no backing that just has sort of algorithmic mechanism that’s meant to keep it stable, [...] the thing that could happen is one of those could launch and be marketed very effectively and be significantly adopted [and] that stablecoin blows up economically and falls apart and the price of that goes down half or close to zero, [...] there are economic experiments being run with some stablecoins that I believe personally could go in that direction.”

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Kwon currently faces $78 million tax evasion charges in his home country of South Korea. Kwon lives in and founded his companies in Singapore, but reportedly manages them in South Korea. Terra’s parent companies, The Ancore Company and Terraform Labs, owe corporation and income taxes.

South Korean law firm LKB & Partners is also suing Kwon on behalf of Seoul Metropolitan Police Agency workers who lost money in Terra ecosystem investments.

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Beyond the legalities, Kwon’s behavior has been perceived as arrogant and dismissive. He once said, “I don’t debate the poor.” He said in early May that 95 percent of coins are going to die, “but there's also entertainment in watching companies die.”

Kwon even named his own daughter Luna after the now-collapsed floating token, a name that could potentially relate to a pyramid scheme-style venture down the line.

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