Terraform Labs is set to face a high-stakes trial on Monday, grappling with civil fraud allegations linked to the collapse of its TerraUSD stablecoin in 2022. Meanwhile, Terra co-founder Do Kwon remains in Montenegro awaiting the decision on whether he will be extradited to the United States or South Korea to face criminal charges. 

Terraform Labs Faces Trial Over $40 Billion TerraUSD Collapse

The civil case against Terraform Labs centers on fraud allegations brought forth by the US Securities and Exchange Commission (SEC), stemming from the collapse of TerraUSD, which resulted in the loss of approximately $40 billion in investor assets. 

According to a Bloomberg report, the trial will see a Manhattan jury deliberating the fraud claims, examining the SEC’s allegations regarding Terraform Labs’ “deceitful practices.” 

While the trial unfolds, Do Kwon finds himself caught in the Montenegro justice system, awaiting the crucial decision on his extradition. Having faced criminal charges in both the US and South Korea, Kwon’s release from a Montenegro prison on Saturday was accompanied by the country’s Supreme Court reviewing earlier court rulings regarding his potential extradition to South Korea. 

The circumstances surrounding Kwon’s extradition challenge SEC enforcers, as civil suits typically take a back seat to criminal proceedings. Until Kwon is in the US, a criminal trial cannot occur.

In light of these developments, the SEC is seeking a court order to enjoin Terraform Labs and Do Kwon from future violations of US securities laws. In addition, the SEC is seeking civil penalties and disgorgement of ill-gotten gains. 

The regulatory authority claims that Terraform Labs defrauded investors by falsely asserting that the popular Korean payment app, Chai, utilized Terraform’s blockchain technology for processing and settling cryptocurrency transactions. 

The SEC further alleges that investors were misled about the stability of TerraUSD, which was purportedly algorithmically “pegged” to the US dollar. Terraform Labs strongly denies these allegations, criticizing the SEC’s characterization of cryptocurrency companies as “lawless.”

Whistleblowers And Key Witnesses Take The Stand

Having filed for Chapter 11 bankruptcy protection in January, Terraform Labs argued it could not pay the penalties sought by federal regulators. Do Kwon, who owns approximately 92% of the company’s equity, faces the daunting task of navigating these legal battles while Terraform Labs’ fate hangs in the balance. 

US District Judge Jed Rakoff, who is presiding over the civil case, ruled in December that Terraform is liable for selling “unregistered securities.” This is in line with the SEC’s hinting that cryptocurrencies other than Bitcoin (BTC) are “securities” under the Howey test, which many pro-crypto advocates and companies believe is an “outdated set of rules and laws.”

However, Terraform maintains that its cryptocurrencies do not fall under the definition of securities, disputes the SEC’s jurisdiction, and intends to appeal the ruling.

During the trial, the jury is expected to hear evidence regarding the involvement of Jump Trading, a Chicago-based trading firm alleged to have entered into a “secretive arrangement” with Terraform Labs to support TerraUSD before its collapse. 

According to Bloomberg, the SEC will allegedly present text messages between Terraform executives discussing the “depeg,” where TerraUSD lost its peg to the US dollar in May 2021. 

Key witnesses include alleged whistleblowers, a Jump Trading executive, and the chief product officer at the Chai payment app, who aim to demonstrate Terraform and Kwon’s intentional deception. It is anticipated that Bill DiSomma, co-founder of Jump Trading, will also testify.

Featured image from Shutterstock, chart from TradingView.com