Terraform Labs vs. SEC: A Multi-Billion Dollar Crypto Trial Unravels

The SEC has waged a full-blown war with Terra and its ex-founder, Do Kwon. In defense of the right to speak, SEC emphasizes that “this is not a case of technology, trial and error, this is a case of fraud.” While defense lawyers call it a failure. Let’s see what is happening.  

A Multi-billion dollar Trial Crypto Begins? 

According to a Bloomberg report, the SEC lawyers have made fraud allegations against Terraform Labs and Do Kwon in his absence. Devon Staren, a lawyer for the US SEC, stated during a civil trial held in the Southern District of New York that Terra was a scam, a house of cards that collapsed, causing investors to lose almost everything. According to the SEC’s estimate, by May 2022, Terra’s value had plummeted, the entire system eventually collapsed, and investors lost more than $40 billion. 

Failure vs. Fraud? 

Devon Staren of the SEC further likened Terraform Labs to a “house of cards” that collapsed on its investors in 2022, leading to massive financial loss to the crypto market. The fall of TerraUSD (UST) triggered a chain of losses for many companies, underscoring the gravity of the situation.

Louis Pellegrino, representing Terraform, claims the SEC’s case is based on selective evidence and testimony from witnesses aiming for whistleblower rewards if the SEC succeeds. Meanwhile, in Terra’s defense, Kwon’s lawyer, David Patton, clarified that the crypto entrepreneur never portrayed Terra’s cryptocurrency as entirely risk-free.

However, the trial began without Do Kwon, who was notably absent on the first day. Kwon, arrested in Montenegro in March 2023 for using fake travel documents, was recently released while awaiting extradition. His role in the trial remains to be determined, adding to the complexity of the legal process.

The SEC lawsuit claims that Terraform Labs and Kwon misled investors about the stability of their algorithmic stablecoin, TerraUSD (UST), causing significant instability. In December 2023, Judge Jed Rakoff ruled partly in favor of the SEC, confirming that Terraform Labs dealt with unregistered securities. However, the court also sided with Kwon and the platform on offering and selling security-based swaps, revealing the complex legal terrain of crypto operations.

What Next?

Finally, the judge will announce the next hearing date in the Terra case during the day. Since Judge Rakof has another trial, it will take time for the new trial date to be announced. However, many think It is the clear motive that the SEC wants Terra to pay compensation and nothing else. 

The ongoing Terraform Labs trial, alongside other significant cases involving key figures such as Sam Bankman-Fried and Changpeng Zhao, is poised to influence the legal terrain of the crypto industry in 2024. These proceedings highlight the growing regulatory scrutiny and legal hurdles confronting the cryptocurrency sector.