Week In Crypto: US Judge Rules That Terraform Labs Sold Securities Illegally

January 5, 2024
A US judge issues three summary judgments against Terraform Labs, India moves to geo-block nine major crypto exchanges, and Binance reports a stellar year despite its compliance headaches.

A US judge issues three summary judgments against Terraform Labs, India moves to geo-block nine major crypto exchanges, and Binance reports a stellar year despite its compliance headaches.

A US District Court judge has ruled that Terraform Labs, creator of the collapsed TerraUSD stablecoin, offered and sold unregistered securities in violation of US law.

In a 71-page opinion, New York judge Jed Rakoff granted summary judgment against the defendants on three counts related to the offer and sale of unregistered securities.

The summary judgments mean that Terraform and Do Kwon, the company’s founder and former CEO, are found liable on these three counts without the need for a jury trial.

However, there are still three other counts that will go to trial, and the trial is scheduled to begin on January 29, 2024. All three counts relate to alleged securities fraud.

Legal observers have called the opinion a “mammoth victory” for the Securities and Exchange Commission (SEC), which filed the original case in February 2023 and amended it to six counts in April 2023.

John Reed Stark, former head of internet enforcement at the SEC, noted that the ruling brings the SEC’s total victories in crypto enforcement cases to almost 200 since 2013.

Terraform crypto-assets were investment contracts

Although the ruling is long, the three counts that do not involve fraud are dealt with swiftly by Rakoff.

Referring to the stablecoin TerraUSD and its collateral token LUNA, Rakoff writes that there is “no genuine dispute” as to whether these assets were securities because they were offered as investment contracts.

The same is said of wLUNA and Terraform’s so-called mirror tokens (MIR). Although most Terraform assets ran on the Terra blockchain, wLUNA was a “wrapped” version of LUNA that ran on the Ethereum blockchain.

MIR tokens were native to Terraform’s Mirror Protocol and could be traded on Terra, Ethereum or BNB Smart Chain.

Users of the Mirror Protocol could create crypto-assets that were designed to mimic the price of real-world assets, including securities.

mAAPL, for example, was a token that was created to mirror the price of Apple stock.

Stablecoins can be securities too

According to Rakoff, the defendants strongly protested that TerraUSD was not in itself a security, because purchasers understood that its value would remain stable at $1.

However, from March 2021 onwards, Rakoff notes that TerraUSD was offered and sold as a security.

In that month, the defendants began urging TerraUSD holders to deposit the stablecoin into Anchor Protocol, a decentralised finance platform, to earn yields of up to 20 percent annually.

Will Do Kwon show up in court?

With a jury trial guaranteed, attention will now turn to the possible extradition of Do Kwon, who is wanted in both the US and his native South Korea.

After serving a three-month prison sentence in Montenegro last year for possession of forged travel documents, Do Kwon was cleared for extradition to either country.

However, due to procedural errors, Do Kwon’s lawyers were able to appeal the verdict and force a retrial of the extradition requests.

India prepares for major crypto exchange ban

In India, a financial regulator has fired a warning shot at nine crypto exchanges that are suspected of flouting the country’s anti-money laundering (AML) laws.

Last week, India’s Financial Intelligence Unit (FIU) issued "Show Cause" notices to Binance, KuCoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEC Global and Bitfinex.

Additionally, the FIU wrote to the Ministry of Electronics and Information Technology (MEITY), asking it to block the URLs of the nine entities.

The regulation in question is the Prevention of Money Laundering Act (PMLA) 2002, into whose remit virtual digital asset service providers (VDASPs) were brought in March last year.

The FIU notes that VDASPs are required to register as reporting entities under the PMLA whether or not they have a physical presence in India.

“The obligation is activity-based,” said the FIU, noting that the PMLA also imposes record-keeping and other obligations on crypto exchanges.

To date, 31 VDASPs have registered with the FIU, but the regulator said that offshore entities catering to a “substantial part” of Indian users have yet to register.

Binance reports a stellar year for user growth

Finally, Binance has published its end-of-year report for 2023, in which it claims strong user growth despite its trouble with US regulators.

According to new CEO Richard Teng, Binance’s total worldwide user base grew 30 percent in 2023, adding 40m new accounts to end the year at 170m.

He also said that net inflows to the exchange have been “very robust”, even after Binance and former CEO Changpeng Zhao pleaded guilty to multiple criminal charges in November last year.

“In 2023, we not only maintained our strength as a robust enterprise and the leader of the world’s most dynamic industry — we dared to embrace change and emerged stronger,” said Teng.

“Much of the overcast of the historical issues in the US is now cleared as we have reached resolutions with regulatory agencies there.”

The report notes that Binance spent $213m on compliance in 2023, and bolstered its in-house wash trading, case management and transaction monitoring systems.

However, in addition to settlements of $4.3bn to the Department of Justice (DOJ) and $2.7bn to the Commodity Futures Trading Commission (CFTC), Binance still has one US enforcement action outstanding.

The crypto giant’s face-off with the SEC remains open, and given the SEC’s recent victories in other similar cases, including the Terraform case described above, it is likely that another penalty is headed for Binance.

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