U.S. federal judge rules against Terraform Labs founder Dohyung Kwon, citing violation of law
Posted: December 29, 2023 9:05 AM Updated: December 29, 2023 9:06 AM
briefly
A U.S. district judge ruled that Do-Kwon Kwon and Terraform Labs violated U.S. law by failing to register two digital currencies that collapsed in 2022.
In a landmark ruling, U.S. District Judge Jed Rakoff struck down cryptocurrency entrepreneur Do Kwon and his company Terraform Labs from registering two digital currencies that face a catastrophic collapse in 2022. It ruled that it was negligent and violated U.S. law.
Judge Rakoff sided with the Securities and Exchange Commission (SEC) following the collapse of the TerraUSD and Luna currencies, highlighting their failure to comply with regulatory requirements.
Rakoff’s decision denied the parties summary judgment on the SEC’s fraud claims. This case is scheduled to go to trial on January 29, 2024. But the judge rejected the SEC’s argument that the defendants illegally offered security-based swaps.
Despite the unfavorable ruling, Terraform expressed strong opposition to the decision. The company maintains that its tokens are not securities and has confirmed its commitment to vigorously defend against the SEC’s “meritless” fraud claims in its upcoming trial.
Kwon Do-do, a South Korean national who faces fraud charges from U.S. prosecutors in Manhattan, has been resisting extradition from Montenegro, where authorities arrested him in March, just hours before the criminal charges were officially announced.
Terraform Labs collapse
Kwon, who designed TerraUSD, a stablecoin designed to maintain a constant value of $1, and Luna, a more traditional token whose value fluctuates closely tied to TerraUSD, saw both cryptocurrencies lose around $40 billion when TerraUSD failed to maintain its $1 peg. I have witnessed more than one loss. May 2022.
The collapse of TerraUSD and Luna had a ripple effect that affected the value of other cryptocurrencies, including Bitcoin.
The SEC’s claims center on allegations that four of the defendants’ cryptocurrency assets, including TerraUSD and Luna, were unregistered securities that qualified as “investment contracts.” Regulators have accused Terraform and Kwon of repeatedly misleading investors about the stability of TerraUSD, including by claiming a potential increase in value.
This passage highlights key differences between the Terraform Labs example and real-world examples. @ripple example:
“However, starting March 2021, UST holders will be able to deposit their tokens into the Anchor Protocol, which was developed through the efforts of the defendants and publicly announced by Mr. Kwon himself… https://t.co/1PGssY5ZAu
— Eleanor Terrett (@EleanorTerrett) December 29, 2023
In the 71-page decision, Judge Rakoff emphasized that there is “no real dispute” regarding the classification of the four crypto assets as securities, citing the 1946 U.S. Supreme Court decision in SEC v. WJ Howey Co, which defined investment contracts. The court ruled that investing money in a joint enterprise and benefiting solely from the efforts of others constitutes an investment contract.
Rakoff acknowledged this, but also noted that reasonable juries might differ on whether the defendants intended to deceive investors in several statements about Terraform’s business. These statements included references to TerraUSD’s temporary failure to maintain its $1 peg in May 2021 and how the popular South Korean mobile payments app used the Terraform blockchain to settle transactions, supporting Luna’s valuation.
The judge made it clear that the SEC’s relief for the sale of unregistered securities will be determined once the defendants’ liability for the fraud claims has been resolved.
The cryptocurrency industry strongly denies that its tokens qualify as securities. In a notable victory last July, another judge in Manhattan federal court ruled that certain tokens sold by Ripple Labs did not qualify as securities.
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Victor is the Managing Technology Editor/Writer at Metaverse Post and covers artificial intelligence, cryptography, data science, metaverse, and cybersecurity within the enterprise space. He boasts of five years of media and AI experience working at renowned media outlets such as VentureBeat, DatatechVibe, and Analytics India Magazine. Having worked as a media mentor at prestigious universities such as Oxford and USC, and holding a master’s degree in Data Science and Analytics, Victor is dedicated to keeping up with new trends. He provides readers with the latest and most insightful stories from the world of technology and Web3.
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victor day
Victor is the Managing Technology Editor/Writer at Metaverse Post and covers artificial intelligence, cryptography, data science, metaverse, and cybersecurity within the enterprise space. He boasts of five years of media and AI experience working at renowned media outlets such as VentureBeat, DatatechVibe, and Analytics India Magazine. Having worked as a media mentor at prestigious universities such as Oxford and USC, and holding a master’s degree in Data Science and Analytics, Victor is dedicated to keeping up with new trends. He provides readers with the latest and most insightful stories from the world of technology and Web3.