Terraform Labs co-founder Do Kwon is reportedly set to be extradited to the United States from Montenegro to face multiple criminal charges related to the collapse of Terraform Labs and a number of other crimes. Meanwhile, Terraform Labs has requested that a jury determine the regulatory status of its tokens, which the U.S. Securities and Exchange Commission (SEC) has labeled as securities. This legal battle continues, but serious accusations of misconduct have been brought forward against the SEC.
Do Kwon To Be Extradited to the U.S.
Terraform Labs co-founder Do Kwon will reportedly be extradited to the United States instead of South Korea to face a series of criminal charges related to the collapse of Terraform Labs as Justice Minister Andrej Milović in Montenegro is planning to grant the extradition request made by U.S. officials. Kwon, who was arrested in Montenegro in March and then sentenced to four months in prison for using falsified travel documents, now faces more trouble in the U.S., where he is charged with eight counts, including commodities fraud, securities fraud, wire fraud, and conspiracy to defraud and engage in market manipulation during his time at Terra. To make matters even worse, the SEC has also decided to step in. The regulator has charged Kwon with "defrauding investors in crypto schemes" in February of this year.
The collapse of Terraform Labs in May 2022 marked a pivotal moment that triggered a huge downturn in the cryptocurrency market. During this period, TerraUSD (UST) depegged from the U.S. dollar, leading to a wave of financial instability. Several very well known firms, including Voyager Digital, BlockFi, Celsius Network, and FTX, had to file for bankruptcy in the aftermath of Terraform Labs' collapse.
Before his arrest in Montenegro, Do Kwon's whereabouts was shrouded in mystery, with many speculating that the Terraform Labs co-founder was based in Singapore. Although it appears that Kwon will first face U.S. officials, some legal experts have not ruled out the possibility of additional charges being brought against him in South Korea as well. However, Kwon has consistently denied any involvement in fraudulent activities.
Justice Minister Andrej Milović has indicated that the official announcement regarding Kwon's extradition will be made publicly "in a timely manner."
Let the Jury Decide…
Terraform Labs, the company behind the failed Terra stablecoin (UST) and the cryptocurrency LUNA, has requested that a New York judge allow a jury to determine the regulatory status of the tokens. In contrast, the SEC is pushing for the judge to make this determination instead.
The SEC filed a lawsuit against Terraform Labs and Do Kwon in February, alleging that they raised significant funds from investors through the "offering and selling of an interconnected suite of crypto asset securities, many of which were unregistered transactions."
In a recent letter addressed to Judge Jed Rakoff, Terraform Labs' lawyer, David Kornblau, argued that it should be a jury's responsibility to decide "whether or not the SEC has met its burden of proving" that UST, LUNA, wLUNA, and MIR tokens qualify as securities. This request comes following a submission by the SEC, wherein the agency argued against this and stated that it is very rare for a jury to determine whether something constitutes an investment contract or not.
The question of whether a cryptocurrency should be classified as a security has been the subject of numerous legal battles between the SEC and various crypto firms. If a token meets the definition of an investment contract, typically evaluated using the well-known Howey test, the issuer is required to register with the SEC and provide specific disclosures to investors.
Terraform Labs had previously requested a summary judgment from the judge in favor of the defendants instead of proceeding to a full trial. However, in the event that the judge does not grant a summary judgment, Terraform Labs is now requesting that the matter be presented to a jury.
The company has cited the precedent set by the 2021 case of Audet vs. Fraiser, where a jury determined that four crypto assets were not securities. In response, the SEC argues that this was the only time when a jury was tasked with defining whether something constituted an investment contract or not. Additionally, the SEC stands firm that there is no doubt regarding the fact that Terraform Labs was involved in the sale of securities.
Terraform Labs May Fight Back
Terraform Labs has accused the SEC of misleading the court in the DEBT Box case regarding the trading platform's digital licensing. This accusation comes after arguments were made between Nov. 17 to Nov. 30, during which the SEC was alleged to have misrepresented evidence.
The controversy reached its peak when, on the fifth day of the trial, Judge Jed Rakoff barred legal experts representing Terraform Labs. This move certainly raised some eyebrows and intensified suspicions surrounding the SEC's conduct in the case. This is not the first time the SEC has been criticized for its actions in the DEBT Box case. Earlier, the regulatory body faced scrutiny for persuading the court to impose a temporary restraining order against the crypto firm. The SEC's tactics reportedly included presenting false evidence.
One of the key claims made by the SEC was that DEBT Box was attempting to move its assets and investors' funds overseas. This assertion led to the court issuing a restraining order against the firm, effectively freezing its bank accounts in August. However, subsequent investigations revealed that these claims were completely untrue.
In response to these revelations, Judge Robert Shelby of Utah has demanded that the SEC provide legitimate reasons for its deceptive actions, warning of potential sanctions if the regulatory body fails to do so.
