Federal Court Rules Against Do Kwon of Terraform Labs Over Legal Violations
In Brief
A U.S. District Judge has determined that Do Kwon and his venture, Terraform Labs, violated federal law by failing to register two cryptocurrencies that experienced a disastrous downfall in 2022.
In a pivotal ruling, U.S. District Judge Jed Rakoff stated that crypto innovator Do Kwon, along with Terraform Labs, breached U.S. law by not registering two digital assets that experienced a significant breakdown in 2022. Terraform Labs Judge Rakoff supported the Securities and Exchange Commission (SEC) following the collapse of TerraUSD and Luna, pointing out their noncompliance with regulations.
Rakoff’s ruling denied summary judgment for either side regarding the SEC's fraud allegations, with the case set to advance to trial on January 29, 2024. However, the judge dismissed the SEC's claims that the defendants were unlawfully offering security-based swaps. SEC Even though the judge's decision was unfavorable, Terraform Labs expressed strong dissent. The company argues that its tokens do not fall under the category of securities and emphasized its determination to defend against what it sees as unfounded fraud allegations in the upcoming trial. regulatory requirements.
Do Kwon, a South Korean national charged with fraud by U.S. prosecutors in Manhattan, is currently resisting extradition from Montenegro, where he was apprehended in March, just before formal charges were revealed.
The stablecoin, which aimed to maintain a constant value of $1, and Luna, a token characterized by its volatile price linked closely to TerraUSD, collectively lost around $40 billion when TerraUSD failed to uphold its $1 value in May 2022.
This collapse triggered a domino effect, adversely affecting the market value of numerous other cryptocurrencies, including
The Collapse of Terraform Labs
Kwon, the architect behind TerraUSD, The SEC's case revolves around the assertion that four of the defendants' crypto tokens, such as TerraUSD and Luna, were not registered as securities and qualified as investment contracts. The agency further accused Terraform and Kwon of repeatedly providing misleading information to investors about TerraUSD’s stability, including misleading claims about its potential for value increase.
The collapse of TerraUSD and Luna This segment underscores a crucial distinction between the Terraform Labs case and others. Bitcoin .
Starting in March 2021, UST holders could deposit their tokens in a protocol developed by the defendants, which Kwon publicly stated would...
In a comprehensive 71-page ruling, Judge Rakoff highlighted that there was 'no genuine dispute' regarding the status of the four tokens as securities, referencing a landmark 1946 U.S. Supreme Court ruling, SEC v. WJ Howey Co., that defined what constitutes an investment contract. The court found that any monetary investment in a shared enterprise, with profits reliant on others' efforts, qualified as such. @Ripple case:
— Eleanor Terrett (@EleanorTerrett) December 29, 2023
While Rakoff acknowledged the classification of the tokens, he also pointed out that reasonable jurors might have differing opinions on whether the defendants intended to deceive investors with various statements regarding Terraform's operations. These included mentions of TerraUSD's temporary inability to maintain its $1 value and how a well-known Korean mobile payment application utilized Terraform's system to execute transactions, hence supporting Luna’s price stability. https://t.co/1PGssY5ZAu
The judge indicated that the SEC’s potential remedies for selling unregistered securities would be determined after resolving the defendants’ liability on the fraud claims. crypto assets The cryptocurrency sector strongly argues that its tokens should not be classified as securities. In a notable ruling last July, another judge in Manhattan ruled in favor of Ripple Labs, determining that certain tokens they sold did not meet the criteria for securities.
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