- The SEC civil case against Terraform Labs for the collapse of stablecoin TerraUSD is moving forward, with Judge Rakoff approving a confidentiality order for discovery materials until trial.
- Terraform Labs co-founder Do Kwon was indicted for fraud in South Korea due to his role in Terra’s collapse and awaits extradition.
- The SEC vs. Terraform Labs case highlights the ongoing debate around the SEC’s enforcement-focused approach to crypto regulation rather than formal guidance.
In February 2022, the U.S. Securities and Exchange Commission (SEC) charged blockchain company Terraform Labs and its co-founder Do Kwon with fraud for allegedly selling unregistered securities. The charges were related to Terraform Labs’ algorithmic stablecoin TerraUSD (UST) losing its peg to the U.S. dollar, causing the ecosystem’s collapse. As the civil case moves forward, new developments have emerged regarding confidential filings.
Confidentiality Order Approved for Discovery Materials
On December 20, 2022, Judge Jed Rakoff approved a protective order submitted by the SEC and Terraform Labs attorneys to keep discovery materials confidential until trial. The confidentiality order, which requires the court to seal any confidential filings, was granted by Judge Rakoff upon finding “good cause.”
Background on Terraform Labs Collapse
The collapse of Terraform Labs and the depegging of UST from $1 wreaked havoc on crypto markets in 2022, contributing to the ongoing bear market. When UST lost its peg in May 2022, it brought down Terraform’s sister token LUNA, erasing tens of billions in market value. The SEC alleges Terraform Labs committed fraud by failing to register UST and LUNA as securities.
Kwon Awaiting Extradition for Charges
Terraform Labs co-founder Do Kwon was indicted for fraud in South Korea due to his role in Terra’s collapse. He is currently jailed in Montenegro awaiting extradition to either South Korea or the U.S. to face charges. The confidentiality order was agreed upon by Kwon’s lawyers and the SEC.
Implications of the Civil Case
The SEC vs. Terraform Labs case could set important precedents regarding securities law applications to crypto assets. Judge Rakoff has already approved Terraform’s move to subpoena FTX over its bankruptcy, showing an expansive discovery process. The confidentiality order may shield sensitive info.
Criticism of SEC’s Crypto Regulation Approach
Many industry participants argue the SEC relies too heavily on enforcement actions rather than formal guidance to regulate crypto. In addition to Terraform Labs, the SEC has pending cases against Kraken, Ripple, Binance, and Coinbase over alleged securities violations. The confidentiality order in SEC vs. Terraform Labs points to the opaque regulatory environment.
