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In a significant development in the world of cryptocurrency, a federal judge ruled on Thursday that Do Kwon, the cryptocurrency entrepreneur behind Terraform Labs, and his company violated U.S. law by failing to register two digital currencies that collapsed in 2022. The ruling by U.S. District Judge Jed Rakoff in Manhattan was a win for the Securities and Exchange Commission (SEC) in a case arising from the collapse of TerraUSD and Luna currencies.
The SEC's case against Terraform Labs centered around the implosion of TerraUSD, a stablecoin designed to maintain a constant $1 price, and Luna, a more traditional token whose value fluctuated but was closely linked to TerraUSD. Both cryptocurrencies suffered substantial losses, estimated at $40 billion or more, when TerraUSD proved unable to maintain its $1 peg in May 2022. The collapse of these tokens also had a cascading effect on the broader cryptocurrency market, impacting the value of other cryptocurrencies, including bitcoin.
Judge Rakoff ruled that Do Kwon and Terraform Labs violated U.S. law by failing to register the digital currencies. He sided with the SEC on these registration-related claims. However, he denied summary judgment to both parties on the SEC's fraud claims, allowing the case to proceed to trial, scheduled for January 29, 2024. The judge dismissed SEC claims that the defendants illegally offered security-based swaps.
The SEC argued that four of the defendants' crypto assets, including TerraUSD and Luna, were unregistered securities because they qualified as "investment contracts." Rakoff, in a 71-page decision, stated that there was "no genuine dispute" that the four crypto assets met the criteria of securities under a 1946 U.S. Supreme Court decision defining investment contracts (SEC v WJ Howey Co).
A spokesman for Terraform Labs expressed strong disagreement with the decision, asserting that the company did not believe its tokens were securities. The company vowed to continue defending against the SEC's "meritless" fraud claims at the trial. Notably, the SEC had not immediately commented on the ruling.
Do Kwon, a South Korea native, is also facing fraud charges by U.S. prosecutors in Manhattan. His legal battles extend beyond the SEC case, as he has been fighting extradition to the United States from Montenegro, where he was arrested in March.
This ruling has broader implications for the cryptocurrency industry, as it underscores the ongoing debate about whether certain tokens qualify as securities. The crypto industry has vehemently denied that its tokens should be classified as securities, and legal battles like these contribute to shaping the regulatory landscape for digital assets.
As the legal proceedings continue, the outcome of the trial will be closely watched by industry participants, legal experts, and regulators. The case highlights the importance of regulatory compliance in the rapidly evolving and often complex world of cryptocurrencies, as well as the potential legal ramifications for entrepreneurs and companies in the space.
