On April 5, 2024, a federal jury in Manhattan returned a verdict finding Terraform Labs and its co-founder, Do Kwon, liable for fraud. In this post, we will explore the core elements of this case and its impact on the broader world of white-collar criminal defense and the future of crypto regulation.
The Collapse of Terraform Labs
Terraform Labs, the company behind the Terra blockchain, saw its demise in 2022 due to the implosion of its algorithmic stablecoin TerraUSD (UST) and its associated reserve cryptocurrency, Luna. This collapse resulted in approximately $40 billion in investor losses reverberating through the cryptocurrency world. The core of the SEC’s case against Terraform revolved around these allegations:
Fraudulent Misrepresentation: The SEC claimed that Terraform Labs and Do Kwon misled investors regarding the stability of the UST stablecoin and that they presented misleading information about the technology underpinning the popular Korean payment app, Chai.
Unregistered Securities: The SEC argued that the cryptocurrencies created by Terraform Labs were “securities” and that by failing to register them, they violated federal securities laws.
The Verdict and its Implications
A jury in Manhattan found Terraform Labs and Do Kwon liable for fraud, delivering a significant win for the SEC. Here are the key takeaways:
SEC’s Authority to Regulate Cryptocurrencies: This verdict strengthens the SEC’s position in its efforts to exercise jurisdiction over the cryptocurrency industry. The finding that Terraform’s cryptocurrencies constitute securities sets a potential precedent for future cases.
Implications for Criminal Cases: Though the burden of proof in criminal cases is higher, the civil verdict may foreshadow difficulties for Kwon in the pending criminal cases brought against him in both the US and South Korea.
Compliance as a Necessity: This case underscores that the SEC is actively targeting crypto companies. The lack of clear regulatory guidance coupled with the SEC’s insistence that current securities regulations are applicable to certain types of cryptocurrencies, including registration requirements, can result in serious legal ramifications.
The Future of Cryptocurrency Regulation
Enhanced Regulatory Scrutiny Aimed At The Cryptocurrency Sector: Companies and individuals operating in this space would be wise to heed the SEC’s message in Gurbir Grewal’s statement, “For all of crypto’s promises, the lack of registration and compliance have very real consequences for real people.” Unfortunately, existing securities regulations do not easily translate to digital assets making the entire landscape confusing a perilous for issuers. While in the end, Terraform Lab’s misrepresentation may place it closer to more commonplace fraudulent conduct, the fact remains that there should be a more clearly defined regulatory scheme governing this emerging and valuable technology.
