Terraform Labs broke laws per U.S. judge; fraud claims still open

A U.S. federal judge ruled Thursday that cryptocurrency company Terraform Labs and its founder Do Kwon violated securities laws by failing to register two digital tokens that collapsed in 2022.

Judge Jed Rakoff sided with the SEC in the case tied to the implosion of the TerraUSD and Luna tokens. The decision marks a blow to the crypto industry’s argument that digital assets should not be deemed securities.

However, Rakoff denied summary judgments on the SEC’s outstanding fraud allegations against Terraform Labs and Kwon, meaning those claims will proceed to a scheduled January 2024 trial.

The SEC had accused the defendants of misleading investors about the stability of the TerraUSD token. Rakoff agreed reasonable jurors could disagree on whether fraud occurred based on statements made by the company.

The case stems from the collapse in May 2022 of the TerraUSD and Luna tokens, which caused estimated losses of $40 billion or more across crypto markets.