Terraform Labs Adopts Defense Strategies Against SEC Actions

Terraform Labs, led by Do Kwon, has been engaged in a protracted legal battle against the United States Securities and Exchange Commission (SEC). This confrontation, which gained momentum following the collapse of UST in 2022, is entering a new phase with Terraform Labs adopting defensive tactics to thwart the SEC’s lawsuit.

Since December 2023, when the SEC won a victory in its securities claims against Terra, the company has employed several strategies to deflect the commission’s scrutiny. These include delays in trials and extradition appeals, demonstrating the continued resistance of Kwon and his team.

Recently, a court document revealed that Terraform Labs filed for bankruptcy as part of its strategy to deal with SEC claims. The request, made on January 21, named Do Kwon as the majority shareholder and listed 15 creditors. The document also mentioned up to US$500 million in assets, set aside to settle the company’s liabilities.

Chris Armani, CEO of Terraform Labs, emphasized the importance of this measure to protect the company against post-judgment liquidations. He highlighted that an adverse financial judgment in the SEC Enforcement Action could be untenable, threatening the company’s existence.

Securities trial and bankruptcy at center of Terraform strategy

The SEC, for its part, has maintained its position, arguing that Terraform Labs’ cryptocurrency tokens are, in fact, securities. This view is reinforced by the decision of Judge Jed Rakoff, who on December 29, concluded that UST, LUNA, wLUNA and MIR are securities because they meet the definition of investment contracts.

Armani challenged this decision, arguing that the Court’s determination should be reversed. And so too, that the cryptocurrency tokens in question do not fall within the legal definition of securities. This stance highlights the complexity in defining cryptocurrencies in the regulatory context.

The first hearing for Terraform Labs’ bankruptcy filing is scheduled for January 31. So while the SEC’s trial of the securities fraud claims is scheduled to begin on March 25, 2024. At the same time, Do Kwon faces legal troubles of his own, being detained in Montenegro on charges of falsifying documents.

Terraform Labs and Do Kwon’s actions are a reflection of their attempt to resist efforts to hold them accountable for the UST collapse and mitigate potential financial consequences. However, this case is a milestone in the legal landscape of cryptocurrencies, illustrating the dynamics between regulators and companies in the sector.

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