The defense sought to distinguish the failure of the Terraform crypto asset, whose implied risk profile was well understood by investors, from the SEC’s alleged fraud. Kwon’s lawyer David Patton reportedly said in his opening statement in court that “failure does not amount to fraud.”
The defense also sought to undermine the credibility of SEC whistleblowers, who reportedly participated only in order to receive financial rewards. The defense dismissed the former Jump employee’s claims as hearsay and cast the Chai whistleblower as a disgruntled ex-employee.
The defense also argued that Chai used the Terraform blockchain and argued that the SEC could not prove otherwise without access to Chai’s source code. Kwon’s lawyers claimed that the information about the “sham deal” between Shin and Kwon was related to another project entirely.
The jury was ultimately unconvinced.
If found responsible, Kwon and Terraform will be subject to financial penalties, the exact amount of which will be determined later by a judge. They may be prohibited from participating in U.S. securities markets in the future. But the case’s repercussions spread further afield.
Before the trial, the defense had requested that the lawsuit be dismissed on the grounds that the SEC misclassified UST, LUNA and other Terraform tokens as securities (a specific class of financial instruments from which investors expect to profit) and therefore lacked jurisdiction. The debate over the proper classification of cryptocurrencies is at the heart of multiple ongoing legal disputes between the U.S. SEC and Ripple, Coinbase and other companies. The crypto industry has repeatedly accused the SEC of “regulating through enforcement” — taking legal action rather than setting clear rules — and jurisdiction.
However, New York presiding judge Jed Rakoff rejected the dismissal argument in an opinion issued before the trial. He ruled that the SEC should be allowed to “address new and difficult issues posed by emerging technologies that affect markets that on their face appear to be similar to securities markets.”
The opinion does not set a rule that other U.S. judges are obliged to follow, but combined with the ruling in favor of the SEC, it sets a precedent for cryptocurrency organizations to violate U.S. securities laws. “This case was heard by a respected judge who was thorough and careful. He was very influential.” Lisa Bragan, an attorney at the Braganza Law Firm and former SEC division chief Lisa Bragança said. “His decisions will be cited over and over again by other judges.”
Terraform had indicated before the trial that it intended to appeal the unfavorable verdict, arguing that the correct classification of its tokens was unclear. Braganza said Kwon’s absence from court prevented him from “sitting at the counsel table, listening to witnesses and responding”, which could support an appeal.
“We are extremely disappointed with the verdict, which we believe is not supported by the evidence,” a Terraform spokesperson said in a statement. “We continue to believe the SEC simply does not have the legal authority to bring this case, and we are carefully weighing our options and next steps.” One step at a time.”
Silva said that in the absence of legislative direction from the U.S. Congress, the classification issue will only be resolved when cryptocurrency cases make their way through the appeals courts and may eventually reach the U.S. Supreme Court. “This is an evolving area of the law,” he said. “With each case, it’s crystallizing. It just hasn’t crystallized yet.”
Kwon will play his role 4,500 miles away in Montenegro.
Updated: April 6, 2024, 6:28 pm ET: This article has been updated to include a statement from Terraform Labs.