In 2023, the cryptocurrency industry was rife with regulatory threats and legal battles, and it is still certainly the case this year. The U.S. Securities and Exchange Commission (SEC) is moving to dismiss its lawsuit against Debt Box after a federal court's critique of the SEC's conduct and misrepresentation of facts. This happened after the court demanded explanations from the SEC to avoid penalties.
Meanwhile, Hong Kong's Securities and Futures Commission (SFC) has issued a warning about the Floki staking program, leading to Floki blocking Hong Kong users from participating due to concerns about unrealistic return promises. In another major crypto-related legal development, Terraform Labs has filed for Chapter 11 bankruptcy as part of its strategy to appeal against the SEC’s lawsuit accusing the firm and its co-founder Do Kwon of securities fraud.
SEC Backtracks on Debt Box Case
The Securities and Exchange Commission (SEC) of the United States is moving to dismiss a lawsuit against Debt Box after a federal court's order questioned the SEC's conduct in the case. This decision came after the court required the SEC to justify why it should not face penalties for misrepresenting facts.
In a Jan. 30 filing in a Utah District Court, the SEC stated its intention to withdraw its lawsuit against Debt Box, stating that dismissal without prejudice was the most appropriate course of action. The SEC admitted that its attorneys could have been more transparent with the court but argued that sanctions were neither necessary nor appropriate for addressing these issues.
The lawsuit originally accused Debt Box of conducting a $50 million fraudulent crypto scheme as a software mining license provider. In August of 2023, the SEC obtained a restraining order to freeze the company's assets, alleging that Debt Box transferred $720,000 overseas and was planning to flee to the United Arab Emirates with even more assets.
However, Judge Robert Shelby, who is overseeing the case, later found that the SEC misrepresented evidence. He clarified that the $720,000 transfer occurred within the United States and not overseas as the SEC claimed. In December, Judge Shelby issued a "show cause order" to the SEC, demanding that the regulator provide a compelling justification for its actions in court.
In response, the SEC has requested the court to disregard Debt Box's plea for additional sanctions, arguing that dismissal with prejudice should be reserved for cases of willful misconduct, which they insist did not happen in this instance.
Naturally, Debt Box's legal representatives have strongly criticized the SEC's handling of the case, accusing them of creating a false narrative and asserting that the SEC should not be allowed to continue this approach just to avoid dismissal of the case.
Floki Staking Program Faces SFC Warning in Hong Kong
In other regulatory news, the Hong Kong Securities and Futures Commission (SFC) issued a warning regarding the staking programs of the dog-themed meme coin project, Floki. On Jan. 26, the SFC alerted investors in its jurisdiction to be cautious when it comes to Floki and TokenFi staking programs, specifically pointing out their promises of annualized returns ranging from 30% to over 100%. The SFC warned that returns like this could be indicative of “suspicious investment products” and advised investors to be wary of schemes offering seemingly unrealistic returns.
In response to this warning, Floki took immediate action by blocking Hong Kong-based users from participating in its staking program. The SFC also emphasized that neither Floki nor TokenFi's investment products were really authorized in Hong Kong, and hence, were not covered under the protections of the Securities and Futures Ordinance (SFO). This means that investors engaging in these schemes could face some substantial risks, including the potential loss of their entire investment.
After the SFC's warning, the team behind Floki released a statement on Jan. 29 via a blog post. They informed the public of their ongoing efforts with legal advisers to address and clarify regulatory concerns about their staking project. As a part of these efforts, they implemented measures to prevent Hong Kong users from joining their staking programs, including the addition of warnings on their websites.
The Floki team has also confirmed that, as of Jan. 29, there have been no records of Hong Kong users participating in their staking programs. With regards to addressing the SFC’s concerns about the high annual percentage yield (APY), the team provided a couple of explanations. They highlighted the volatile nature of the rewards, stating that they are influenced by market dynamics and the fluctuating market valuation of the token rewards.
Bankruptcy Filing to Counter SEC Lawsuit
Meanwhile, Terraform Labs, the creator of the defunct stablecoin TerraClassicUSD (USTC), filed for Chapter 11 bankruptcy on Jan. 21, a move the firm now believes will be pivotal in its appeal against a lawsuit filed by the SEC. In a Jan. 30 submission to a Delaware Bankruptcy Court, CEO Chris Amani stated that the bankruptcy was crucial for the firm's legal strategy. Terraform Labs argues that Chapter 11 bankruptcy could allow them to lodge an appeal without posting a "supersedeas bond," usually required to be 110% of the total judgment.
Amani contends that the SEC lacks authority over Terraform Labs, challenging the designation of its crypto assets as securities and believes the case falls outside the SEC's jurisdiction. He also revealed that the company's treasury holds large amounts of assets in Bitcoin, other cryptocurrencies, and LUNA tokens.
The SEC, in February of 2023, accused Terraform Labs and its co-founder Do Kwon of conducting a "multibillion-dollar crypto asset securities fraud" involving UST and LUNA. This legal action also comes in the wake of the Terra Money ecosystem's collapse in May of 2022, which led to a huge financial fallout and Kwon's eventual arrest in Montenegro in March 2023 on charges of using falsified travel documents.
The case has attracted international attention, with both the U.S. and South Korea seeking Kwon's extradition. If extradited to South Korea, Kwon could face up to 40 years in prison for the majority of his alleged crimes. The latest development in the case is the SEC's agreement to postpone Kwon's fraud trial to Mar. 25, after a request for delay from his legal team.
