A recent court decision has once again brought to the forefront the regulatory challenges surrounding Security Tokens in the crypto industry. On Thursday, a U.S. District Judge in Manhattan ruled against crypto entrepreneur Do Kwon and his company, Terraform Labs, for failing to comply with U.S. securities laws. This ruling is particularly significant considering the collapse of TerraUSD and Luna currencies in May 2022.
The case against Terraform Labs PTE Ltd and Do Hyeong Kwon a/k/a Do Kwon, the operators of the so-called Terra-Luna stablecoin scheme, initiated by the U.S. Securities and Exchange Commission (SEC) in February 2022, accused the Singapore-based company of conducting a multi-billion dollar securities fraud involving a stablecoin and other crypto securities.
According to the SEC, Terraform and Kwon raised billions through the sale of crypto asset securities in unregistered transactions, while making misleading claims about their potential for profit.The court’s decision specifically noted Kwon’s previous comments, suggesting that investors in LUNA could expect profits based solely on his and Terraform‘s efforts, thus satisfying the criteria of the Howey test – a benchmark for determining what constitutes a security.
Similarly, the court found that MIR token holders were led to expect profits from Terraform‘s development and growth of the Mirror Protocol, again meeting the Howey test criteria.
Despite the clear ruling on these securities, Judge Rakoff has not granted a summary judgment on the SEC’s fraud claims, which are set to proceed to a trial scheduled for January 29, 2024. However, he dismissed claims related to illegal offering of security-based swaps.
Terraform‘s response to the decision was one of strong disagreement, maintaining that their tokens are not securities and expressing their intent to continue contesting the SEC’s fraud claims in court.
Do Kwon, a South Korean native, is also facing fraud charges in the U.S. He is currently resisting extradition from Montenegro, where he was apprehended shortly before the charges were announced.
Read more about the impact of the court order here on FinCrime Observer.
This ruling is significant in the context of the broader crypto market, especially following the Terra-Luna scheme’s collapse, which preceded a series of failures in other major crypto entities. The SEC’s position is that TerraUSD and Luna, among other crypto assets offered by the defendants, were unregistered securities, primarily based on their nature as investment contracts.
