SEC Secures Victory Over Terraform, Do Kwon in Securities Ruling

The United States District Court has ruled in favor of the Securities and Exchange Commission (SEC) against Terraform Labs and its former CEO, Do Kwon. This decision, issued by District Court Judge Jed Rakoff, concludes that the entities were involved in the offering and selling of unregistered securities, explicitly targeting the cryptocurrencies LUNA and MIR.

Mixed Verdict on Security-Based Swaps

However, the court presented a nuanced view on security-based swaps. The defendants received a favorable judgment regarding these swaps’ unregistered offer and sale. The focus was on Terraform’s Mirror Protocol, which allowed users to mint “mAssets,” mirroring real-world assets on the blockchain. The court disagreed with the SEC’s view that these mAssets constituted security-based swaps, concluding they did not meet the legal definition.

Application of the Howey Test

The ruling heavily relied on the Howey test to determine the nature of the investments. The court noted a previous statement from Kwon, indicating that LUNA investors were effectively putting their money in a common enterprise with expectations of profits from the efforts of Terraform Labs and Kwon. 

Similarly, the MIR token was judged under the same criteria, with the court concluding that it indeed satisfies the Howey test due to the expectation of profits driven by Terraform’s developmental efforts.

Expert Testimonies: A Decisive Element

Another critical aspect of the case was the court’s stance on expert testimonies. Concurrently, the SEC’s motion to exclude the testimony of defense expert Dr. Terrence Hendershott was rejected. However, the court allowed the depositions of the SEC’s experts, Dr. Bruce Mizrach and Dr. Matthew Edman, reinforcing the SEC’s position in the case.

SEC’s Fraud Claims Pending Trial 

Despite these rulings, the court did not grant summary judgment for either party on the SEC’s allegations of fraud against Terraform Labs and Kwon. These claims, involving an alleged fraudulent cryptocurrency scheme that erased over $40 billion in market value in 2022, are set for a jury trial. The jury selection is scheduled for January 24, 2024, marking the next phase in this high-profile legal battle.

This decision is significant in the ongoing scrutiny and regulatory efforts surrounding cryptocurrencies and blockchain enterprises. The outcome of the pending jury trial will be closely watched, as it could set precedents for future cases in this rapidly evolving field.

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Kelvin is a distinguished writer specializing in crypto and finance, backed by a Bachelor’s in Actuarial Science. Recognized for incisive analysis and insightful content, he has an adept command of English and excels at thorough research and timely delivery.

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