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A New York jury has found Terraform Labs and its co-founder Do Kwon liable for defrauding cryptocurrency investors as part of a scheme that allegedly caused a $40 billion loss in market value.
The civil ruling, handed down after a nine-day trial in Manhattan federal court, is a win for the US Securities and Exchange Commission as the regulator launches a crackdown on the cryptocurrency sector. Last year, the Securities and Exchange Commission sued the collapsed stablecoin operator and Kwon for allegedly raising billions of dollars from investors by selling several interconnected digital securities, many of which were not registered with regulators.
These assets included TerraUSD, a stablecoin developed by Kwon whose sudden collapse in 2022 rocked the cryptocurrency industry, as well as the associated Luna token, according to the SEC.
Terraform and Kwon “caused devastating losses to investors and wiped out tens of billions in market value almost overnight,” Gurbir Grewal, director of the SEC's enforcement division, said Friday following the ruling.
He added that they “deceived investors about the stability of the security of crypto assets and the so-called algorithmic stablecoin TerraUSD, and also misled investors about whether a popular payment application uses Terraform's blockchain to process and settle payments.”
The agency's head, Gary Gensler, has increased scrutiny of the sector, which he described as a “Wild West” rife with non-compliance and misconduct. He has argued that many digital tokens qualify as securities and fall under the jurisdiction of the SEC.
“For all the promises of cryptocurrencies, the lack of registration and compliance has very real consequences for real people,” Grewal said.
It also deals a new blow to Terraform and its South Korean CEO, which faced legal challenges after the collapse of TerraUSD and luna, including charges of criminal fraud.
Kwon, who was residing in South Korea and Singapore at the time of the alleged fraud, is also in the midst of a fierce extradition battle. Wanted by the United States and South Korea on criminal charges, he is being held in Montenegro and was not present at the civil trial in Manhattan.
In its complaint filed last year, the SEC accused Terraform and Kwon of orchestrating a massive cryptocurrency scam between April 2018 and May 2022, which allegedly resulted in a $40 billion loss in market value.
The regulator said the defendants marketed their digital assets with misleading statements, such as telling investors that the popular South Korean mobile payment app was using the Terra blockchain to settle transactions that would add value to the Luna token.
Terraform filed for Chapter 11 bankruptcy protection in Delaware earlier this year.
Lawyers for Terraform and Kwon did not immediately respond to requests for comment.
