According to a Sept. 22 filing, the co-founders of the now-defunct Terra blockchain project are alleged to have planned to create fraudulent transactions during the project’s development.

There, the Securities and Exchange Commission (SEC) noted that Terraform Labs partnered with a payments app called Chai, supposedly so that the latter app could settle transactions on-chain. The SEC claims that the leaders “faked Chai payments onto the Terraform blockchain” when Chai payments were in fact carried out traditionally.

While Terraform Labs was headed by co-founder and then-CEO Do Kwon, Chai was created and led by another Terraform Labs co-founder, Daniel Shin.

In chat logs dating back to 2019, Shin and Kwon discussed how falsified transactions could help support their activities. Shin began by asking Kwon when participants would begin to engage in staking and when token airdrops would end.

Kwon suggested that early activity would be falsified, as he replied:

“I can just create fake transactions that look real, which will generate fees … and we can wind that down as Chai grows.”

Shin then expressed concerns that end users would find out that the activity in question had been falsified. To that criticism, Kwon said:

“All the power to those than can prove it’s fake … because I will try my best to make it indiscernible. I won’t tell if you won’t.”

Shin in turn agreed to test this plan on a small scale. Kwon concluded, “ok.”

The extent to which the co-founders actually falsified data in practice is unclear, as the relationship between Terraform Labs and Chai ended in 2020. However, the partnership allegedly lasted long enough to produce a very effective deception: the SEC claims that investors bought “hundreds of millions of dollars” of LUNA and other tokens in the belief that the relevant Chai transactions were carried out on Terra’s blockchain.

SEC wants Kwon brought to the U.S.

The SEC included the above chat logs as part of a filing through which it aims to have Kwon deposed and made to provide testimony in a securities case.

The SEC’s request, if it is successful, will require Kwon to be extradited to the United States from Montenegro, where he was recently sentenced to prison for forgery of travel documents. On Sept. 27, defense lawyers attempted to challenge the SEC’s request, stating that it is “impossible” to have Kwon leave Montenegro.

Defense lawyers at that time also asserted 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, at which time it alleged unregistered securities sales and fraud.