Key Takeaways
- Court ruled that TerraUSD and Luna, qualify as “investment contracts” and hence represent unregistered securities.
- Court to deliberate over whether the defendants intended to defraud investors in their communications.
In a groundbreaking decision, U.S. District Judge Jed Rakoff ruled in favor of the Securities and Exchange Commission (SEC), confirming that Terraform Labs and its founder, Do Kwon, engaged in the offering and sale of unregistered securities.
The ruling specifically involves cryptocurrencies such as LUNA and UST, marking a significant victory for the SEC and emanating from the collapse of TerraUSD and Luna currencies.
The court granted summary judgment in favor of the SEC, asserting that four of the defendants’ crypto assets, including TerraUSD and Luna, qualify as “investment contracts” and hence represent unregistered securities.
This aligns with a 1946 U.S. Supreme Court ruling defining investment contracts. However, Judge Rakoff denied summary judgment on the SEC’s fraud claims, paving the way for a trial scheduled for January 29, 2024.
Do Kwon, a South Korea native and founder of Terraform Labs, is concurrently facing fraud charges from U.S. prosecutors in Manhattan. Kwon, presently resisting extradition from Montenegro, was instrumental in designing TerraUSD and Luna, with TerraUSD intended as a stablecoin maintaining a constant $1 value.
The collapse of TerraUSD in May 2022, resulting in losses estimated at $40 billion, triggered a cascade effect impacting the broader cryptocurrency market.
Kwon’s legal battles extend beyond the courtroom, encompassing an extradition challenge from Montenegro, where he was arrested in March. This occurred several hours before the criminal fraud charges were officially announced in the United States.
The SEC’s argument centered on the assertion that Terraform and Kwon misled investors about the stability of TerraUSD, claiming that their cryptocurrencies would appreciate in value. While the court acknowledged the SEC’s claim that the crypto assets were unregistered securities, it underscored that jurors may still deliberate over whether the defendants intended to defraud investors in their communications.
As the case advances to trial, additional elements of the securities fraud charges will be explored. This includes scrutinizing whether Kwon provided deceptive information about the security of Terraform’s financial products, including the algorithmic stablecoin UST.
