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  • L Higgins

D'Oh Kwon: Terraform Labs and Founder lose SEC battle

Following a nine day trial in the Manhattan federal court, a verdict has been handed down by the jury, finding Terraform Labs and its co-founder, Do Kwon, liable for security fraud by misleading investors. The director of the SEC’s enforcement division, Gurbir S. Grewal, had the following to say:

Terraform Labs and [Do Kwon] deceived investors about the stability of the crypto asset security and so-called algorithmic stablecoin TerraUSD, and they further misled investors about whether a popular payment application used Terraform’s blockchain to process and settle payments

The SEC's position is consistent with their rhetoric when it comes to cryptocurrency and blockchain, signaling that there is likely to be no change in course from the SEC's "regulation by enforcement" approach, alleging that crypto projects should register with the SEC and comply with existing laws, while ignoring the many lawyers, and Commissioner Hester Peirce, who have pointed out there is no actual way for crypto projects to register or comply:

For all of crypto’s promises, the lack of registration and compliance have very real consequences for real people. As the hard work of our team shows, we will continue to use the tools at our disposal to protect the investing public, but it is high time for the crypto markets to come into compliance

The jury deliberated for a mere two hours after the closing arguments were heard from the lawyers for the SEC and defendants. The SEC’s primary argument was that Kwon and Terraform Labs, under his direction, had deceived investors and consumers about the nature of the algorithm that pegged its stablecoin, TerraUSD (TUSD), to the US dollar.


The SEC believes that Do Kwon implied to the public that the algorithm underpinning the peg operated independently of human interference. This was a topic hotly debated by crypto enthusiasts and industry experts alike, with many believing the collapse of Terra/Luna and TUSD was attributable to a "complex phenomenon that happened across multiple chains and assets", rather than concentrated market manipulation by a third party. As evidenced by the jury’s decision, the claim that the algorithm was immune from market manipulation (i.e. human interference) was accepted as fraudulent behaviour by Do Kwon and Terraform Labs.


As reported by CoinDesk, a representative for Terraform Labs stated that they were continuing to consider their options (such as an appeal) and otherwise remained steadfast that the SEC does not have authority to bring the case against them.


Shrouded in controversy since Terra/Luna's collapse in May 2022, debate still looms online amongst enthusiasts as to whether the actions of Do Kwon were wrong, or whether these actions by the US and South Korea are simply first hand examples of two jurisdictions wanting to send a message.


Despite a verdict being reached in New York, the battle between the US and South Korea for Do Kwon's extradition remains, with the Montenegro Supreme Court assessing the conflicting requests.


In the wake of the Manhattan federal court's verdict, Do Kwon and Terraform Labs face the consequences of deceiving investors about TerraUSD's stability. As sentencing looms, the debate over jurisdiction and accountability continues, casting a shadow over the future of cryptocurrency regulation.


By Luke Higgins and Michael Bacina

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