The defense attempted to draw a distinction between the failure of Terraform’s crypto assets, whose risk profile it implied was well understood by investors, and the acts of fraud alleged by the SEC. “Failure doesn’t equal fraud,” David Patton, attorney to Kwon, reportedly told the courtroom in his opening statement.
The defense also sought to undermine the credibility of the SEC whistleblowers, whom it reportedly suggested were in it only for the financial reward. The defense dismissed the account of the former Jump employee as hearsay and cast the Chai whistleblower as a disgruntled former staffer.
The defense also contended that Chai had utilized the Terraform blockchain, and argued that the SEC could not prove otherwise without access to the Chai source code. The messages between Shin and Kwon about “fake transactions,” Kwon’s lawyers claimed, related to a different project entirely.
The jury was ultimately unconvinced.
Having been found liable, Kwon and Terraform will be dealt a financial penalty, the size of which will be confirmed by the judge at a later stage. They’ll likely be prevented from participating in the US securities market in the future. But the implications of the case spill further afield.
Before the trial, the defense had called for dismissal on the grounds that the SEC had misclassified UST, LUNA, and other Terraform tokens as securities—a specific class of financial instrument from which investors expect to profit—and, therefore, lacked jurisdiction. The debate over the appropriate classification of crypto is central to multiple ongoing legal disputes in the US, between the SEC and Ripple, Coinbase, and other firms. The crypto industry has repeatedly accused the SEC of “regulation by enforcement”—of wielding legal action instead of articulating clear rules for the road—and making a jurisdictional land grab.
However, in an opinion issued before the trial, Judge Jed Rakoff, who presided over the Kwon case in New York, rejected the arguments for dismissal. The SEC should be allowed to “resolve new and difficult questions posed by emerging technologies where the technologies impact markets that on their face appear to resemble securities markets,” he ruled.
The opinion does not establish a rule that other US judges are duty bound to follow, but in combination with the verdict in favor of the SEC, sets a precedent of sorts for a crypto organization having violated US securities laws. “This case is before a well-respected judge who is thorough and careful. He’s influential,” says Lisa Bragança, attorney at Bragança Law and former branch chief at the SEC. “A decision from him will be cited over and over again by fellow judges.”
Terraform had already signaled prior to the trial its intention to appeal an unfavorable verdict, citing the ambiguity over the proper classification of its tokens. The absence of Kwon from the courtroom, which denied him the ability to “sit at the counsel table, hear the testimony of witnesses, and respond,” says Bragança, could support the appeal bid.
“We are very disappointed with the verdict, which we do not believe is supported by the evidence,” a Terraform spokesperson said in a statement. “We continue to maintain that the SEC does not have the legal authority to bring this case at all, and we are carefully weighing our options and next steps.”
In the absence of legislative direction from the US Congress, says Silva, the classification question will be settled only when a crypto case moves through the appellate courts, perhaps arriving eventually at the US Supreme Court. “It’s an evolving area of the law,” he says. “It’s crystallizing with each case that comes down. It just hasn’t crystallized yet.”
From 4,500 miles away in Montenegro, Kwon will have played his part.
Updated: 4/6/2024, 6:28 pm EST: This story has been updated to include a statement from Terraform Labs.
