Terraform Labs and Founder Do Kwon Ordered to Face Fraud Allegations by U.S. Securities and Exchange Commission

Terraform Labs and Founder Do Kwon Ordered to Face Fraud Allegations by U.S. Securities and Exchange Commission

Terraform Labs and its founder, Do Kwon, have been ordered to confront fraud allegations brought forth by the U.S. Securities and Exchange Commission (SEC), as ruled by U.S. District Judge Jed Rakoff in Manhattan on Monday.

Last year, Kwon and Terraform Labs were associated with two cryptocurrencies whose collapse significantly impacted global crypto markets. The judge denied their motion to dismiss the accusations, which assert that they deceived investors and sold billions of dollars in unregistered securities represented by digital assets.

In response to the ruling, a spokesperson for Terraform Labs asserted the company’s commitment to contesting the SEC‘s claims, stating that they believe the allegations to be misguided and flawed.

The implicated stablecoin, TerraUSD (UST), designed to maintain a 1:1 peg to the U.S. dollar, derived its value from another paired token called Luna. However, both tokens suffered a substantial loss in value when TerraUSD slipped below its 1:1 dollar peg in May 2022. Before its collapse, TerraUSD held a market cap exceeding $18.5 billion, securing its position as the 10th largest cryptocurrency.

The SEC’s complaint alleges that Terraform Labs and Kwon misled investors about the stability of UST and made assertions that the firm’s crypto tokens would appreciate in value. Judge Rakoff’s ruling permits the regulator to proceed with the allegations against them.

Comparing this case with a recent one involving Ripple Labs, where U.S. District Judge Analisa Torres ruled that Ripple’s XRP sales on public cryptocurrency exchanges were not considered securities offers, Rakoff disagreed with the approach taken. One of the factors in Judge Torres’ decision was the uncertainty for purchasers regarding whether their funds went to Ripple or a third party.

Regarding the Terraform Labs case, SEC attorneys expressed disagreement with Judge Torres’ ruling and indicated that the SEC staff is exploring avenues to have it reviewed.

Judge Rakoff emphasized that the identity of the seller does not influence whether a reasonable investor would interpret statements made by Kwon and his company as a “promise of profits based on their efforts.”

The case is officially identified as SEC v. Terraform Labs Pte Ltd. et al., No. 23-01346, in the U.S. District Court, Southern District of New York.