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In an SEC lawsuit, Terra founder Do Kwon was found liable for fraud

The claim that the stablecoin issuer and its proprietor deceived investors is upheld by the federal regulator.

In a pivotal decision emanating from a Manhattan federal court, Terraform Labs alongside its founder, Do Kwon, have been found accountable on charges of civil fraud. This verdict aligns with the allegations put forth by the U.S. Securities and Exchange Commission (SEC), marking a significant moment in the agency’s ongoing efforts to regulate the burgeoning cryptocurrency sector.

The SEC’s case centered around accusations that Terraform Labs and Kwon had engaged in deceptive practices concerning the stability and functionality of TerraUSD, a stablecoin designed to maintain a consistent one-to-one value with the US dollar. The agency further contended that the defendants had made unfounded claims about the integration of Terraform’s blockchain technology in a widely used South Korean mobile payment application.

The collapse of TerraUSD in May 2022, alongside its affiliated token Luna, catalyzed a staggering $40 billion loss and precipitated a domino effect across the crypto market, leading to bankruptcies and heightened regulatory scrutiny. The SEC estimated the financial toll of the debacle on investors to be monumental, underscoring the critical need for regulatory compliance within the cryptocurrency industry.

The trial, which unfolded over two weeks and culminated in a swift jury verdict following the closing arguments, saw the SEC pushing for significant civil financial penalties and proposing bans to prevent Kwon and Terraform Labs from further participation in the securities industry. Judge Jed Rakoff is slated to deliberate on the penalties, considering arguments from both the SEC and the defense in the upcoming weeks.

Reacting to the verdict, a spokesperson for Terraform expressed disappointment, challenging the SEC’s jurisdiction and authority to prosecute the case. Meanwhile, SEC officials hailed the decision as a vindication of the regulatory body’s stance on the necessity of registration and compliance within the crypto market, emphasizing the real-world repercussions of non-compliance for investors.

This legal battle has not only highlighted the precarious nature of cryptocurrency investments but also signaled a broader regulatory crackdown on the sector. Terraform Labs, having declared bankruptcy earlier this year, and Do Kwon, currently detained in Montenegro due to separate charges, face an uncertain future as they contemplate their next steps amidst ongoing legal challenges and a potential appeal against the ruling.

In the wake of this landmark decision, the crypto industry faces a period of introspection and adaptation, as the calls for enhanced regulatory oversight grow louder, aiming to safeguard investors and stabilize the market landscape.

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