The Terraform trial holds significant implications for the crypto industry. A win for the SEC would solidify its authority to regulate cryptocurrencies deemed securities.
The fallout of the 2022 TerraUSD collapse remains as Terraform Labs, the organization behind the algorithmic stablecoin, confronts a civil fraud trial in New York today, March 25th, 2024, according to Bloomberg. Terraform Labs and its founder, Do Kwon, stand accused by the US Securities and Exchange Commission (SEC) of deceiving investors concerning TerraUSD’s stability and its companion token Luna.
The SEC alleges that under Kwon’s oversight, Terraform Labs engaged in a deceptive scheme, resulting in the astonishing collapse of UST and its linked token Luna in May 2022. The allegation states Kwon, and Terraform falsely promoted UST as a stablecoin pegged 1:1 to the US dollar, failing to disclose vital details regarding its algorithmic mechanism and alleged covert interventions to sustain the peg.
The crash of UST and Luna devastated crypto markets, obliterating over $40 billion from investors’ coffers, SEC data indicates. Furthermore, the outcome catalyzed a domino effect, ending in numerous crypto firms declaring bankruptcy throughout 2022’s turbulent fiscal year.
SEC’s Unprecedented Challenge in Kwon’s Case
The SEC faces a distinct challenge in this civil case. Typically, criminal prosecutions take precedence over civil suits. However, the ongoing extradition battle involving Kwon requires the SEC’s civil proceedings, as a criminal trial in the US cannot commence until his extradition. Consequently, this exceptional situation compels the SEC to pursue the civil case despite potentially lacking a key figure’s presence.
Securities Exchange Commission strives to prohibit Terraform and Kwon from potential violating securities regulations. They seek legal intervention, monetary sanctions, and restoration of supposed illicit gains. Conversely, Terraform asserts its innocence, condemning the SEC’s “unbounded zeal” regarding cryptocurrency oversight.
The trial’s core issue centers on categorizing Terraform’s cryptocurrencies as securities and UST’s claimed stability. Terraform contends its offerings don’t qualify as securities, exempting them from SEC oversight. However, the presiding judge ruled in SEC’s favor regarding the securities classification, leaving the jury to determine the truthfulness of Terraform’s assertions regarding UST’s stability.
Another point of contention is regarding Jump Trading, a firm from Chicago secretly helped support UST a year before it failed. The SEC wants to show text messages between Terraform executives talking about a “depeg” event in May 2021 when UST went off its dollar peg. These messages supposedly show Terraform admitting Jump Trading involved to stabilize UST.
SEC Trial Puts Terraform Labs’ Future at Stake
The Terraform trial holds significant implications for the crypto industry. A win for the SEC would solidify its authority to regulate cryptocurrencies deemed securities. While the fate of Do Kwon remains uncertain, this trial underscores the risks inherent to algorithmic stablecoins and the ongoing regulatory tussles within the cryptocurrency landscape.
The SEC’s litigation will also include testimony from whistleblowers, encompassing a Jump executive and Chai payment app’s chief product officer, whose accounts seek to establish that Terraform and Kwon deliberately misled investors.
The trial, lasting a minimum of two weeks, will coincide with FTX’s Bankman-Fried receiving his criminal sentencing verdict on Thursday. Prosecutors petitioned the judge for a potential 50-year incarceration period for the 32-year-old. Conversely, his legal team has petitioned for a considerably reduced term of 6 1/2-year sentence.
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