SEC’s Secures Victory Against Do Kwon and Terraform Labs

Terraform founder Do kwon

SEC victory against Terraform Labs as the landmark case redefines regulatory framework for digital assets

The United States Securities and Exchange Commission (SEC) has scored a significant legal victory against Do Kwon and Terraform Labs, marking a pivotal moment in digital assets’ regulatory landscape. After a two-week trial, a Manhattan court jury found  Do Kwon, a South Korean crypto entrepreneur, and his firm, Terraform Labs guilty of civil fraud. 

In February 2023, the U.S. Securities and Exchange Commission unveiled accusations against Kwon and Terraform, alleging that the Terra co-founder misrepresented the TerraUSD algorithmic stablecoin’s characteristics, leading to its decoupling from the U.S. dollar and eventual plummet to zero. Unlike conventional stablecoins such as Circle’s USDC, Terra’s LUNA lacked any form of collateralization. 

Also read: Is Litecoin (LTC) Becoming Altcoins’ Crypto Pack Leader?

Where did it all start? 

The SEC had charged Terraform Labs and its founder, Do Kwon, with allegedly misleading its investors in 2021 when concerns arose regarding the stability of TerraUSD, a stablecoin engineered to uphold a dollar’s value. The company’s failure later led to the collapse of the crypto, as investors lost more than $40 billion.

In his statement, SEC Chair Gary Gensler characterized the losses experienced by Terra investors as “significant.” The dramatic decline of one of the leading cryptocurrency entities, which once boasted two coins in the top 10 rankings, also triggered numerous bankruptcies across the cryptocurrency industry.

The SEC’s enforcement action targeted Do Kwon, the founder of Terraform Labs, and his involvement in creating and distributing Terra’s native token, LUNA. Terra is a blockchain platform known for its stablecoin protocol and ecosystem of decentralized applications (dApps). LUNA serves as the governance and staking token within the Terra ecosystem. The regulatory scrutiny focused on Terraform Labs’ initial coin offering (ICO) of LUNA in 2019. The SEC alleged that the ICO constituted an unregistered securities offering, violating federal securities laws. The SEC argued that investors purchased LUNA with the expectation of future profits based on the efforts of Terraform Labs, thus meeting the criteria of security under the Howey Test.

In response to the SEC’s allegations, Terraform Labs and Do Kwon contested the classification of LUNA as a security, asserting that it should be considered a utility token rather than an investment contract. They argued that LUNA’s primary function was to facilitate transactions and participate in the governance of the Terra blockchain, rather than serving as an investment vehicle.

However, the court ruled in favor of the SEC, affirming that LUNA met the definition of security and that Terraform Labs had conducted an unregistered securities offering. The ruling underscores the SEC’s authority to regulate digital asset offerings, even within the decentralized and often ambiguous realm of DeFi. The outcome of this case sets a precedent for future regulatory actions against DeFi projects. It highlights the importance of compliance with securities laws in the rapidly evolving landscape of blockchain technology.

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