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SEC seeks summary judgment against Terraform Labs

Policy & Regulation·November 04, 2023, 9:12 AM

The U.S. Securities and Exchange Commission (SEC) is making a strong push for a summary judgment in its ongoing legal battle against Singapore’s Terraform Labs and its co-founder Do Kwon. Such an outcome would spare the need for a protracted trial.

According to a motion filed by the SEC on Thursday, the record shows that there is “no genuine dispute as to any material fact and that the moving party is entitled to judgment as a matter of law.”

Photo by Caleb Fisher on Unsplash

 

Relying on the Howey Test

The SEC’s filing underscores its central argument that Kwon and Terraform Labs were involved in the sale of securities. The document categorically states:

“There is no dispute that purchasers made an investment of money, either through fiat currency or crypto assets, for each crypto asset — LUNA, wLUNA, MIR, and UST, thereby satisfying the first prong of Howey.” The Howey Test refers back to a U.S. Supreme Court case — SEC v. Howey — which took place in 1946. The case set a precedent and has subsequently become the cornerstone of determining what is or is not a security in the United States.

This argument hinges on the idea that funds were pooled in a common enterprise with the expectation of profits primarily derived from the efforts of the promoters.

 

Citing fraud as well as unregistered securities

The SEC’s assertion is two-fold, contending that not only did Terraform and Kwon engage in selling securities, but they also engaged in fraudulent activities and disseminated misleading information. The SEC reiterates these claims in its filing, emphasizing that the defendants committed fraud by duping investors about the stability of UST.

They allegedly falsely attributed the algorithm for price stabilization while orchestrating clandestine third-party interventions. This purported deception made their claims regarding the algorithm’s effectiveness deceptive and involved the omission of crucial information. The fallout from Terra’s collapse in May of the previous year resulted in the destruction of substantial investor wealth, totaling billions of dollars.

 

Similar defense team filing

The SEC’s move to seek summary judgment comes in the wake of a similar filing by Kwon’s defense team last Friday. Kwon is currently serving a sentence for document forgery in Montenegro, a situation stemming from his arrest at an airport with forged passports.

Notably, Terraform’s co-founder, Daniel Shin, who is currently on trial in South Korea, has attributed the collapse of Terraform Labs to Kwon’s mismanagement. Shin has claimed his separation from the company and its activities occurred two years before its eventual collapse.

In this legal battle that holds significant implications for the cryptocurrency and blockchain space, the SEC continues to emphasize its position, asserting that Kwon and Terraform Labs engaged in the sale of securities through deceptive means. The outcome of this case could have far-reaching consequences, setting precedents for future regulatory actions in the industry.

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Web3 & Enterprise·

Nov 07, 2023

Okto commits $5 million treasury fund to support Vauld users

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Policy & Regulation·

May 31, 2023

Bank of Japan Publishes Results of CBDC PoC

Bank of Japan Publishes Results of CBDC PoCThe Bank of Japan (BoJ) recently concluded the second phase of its central bank digital currency (CBDC) proof of concept (PoC) project, which began in April. The results of this phase were published on Monday, and they shed light on key aspects such as the comparison between account-based and token-based CBDCs and the management of holding limits for users with multiple accounts.Photo by Manuel Cosentino on UnsplashToken-based CBDCsThe experiments conducted by the central bank covered a wide range of topics. Among the most intriguing findings were the advantages and disadvantages of token-based CBDCs and how to effectively impose holding limits for users with multiple CBDC balances.Token-based CBDCs have garnered interest from various central banks, with some adopting the UTXO token model used by Bitcoin without the use of a distributed ledger. A UTXO or unspent transaction output, defines where a blockchain transaction starts and finishes. The Bank of Japan explored this model and analyzed its pros and cons.In the initial proof of concept, both account-based and token-based CBDCs were examined, considering scenarios where the central bank managed the ledger or shared it with intermediaries like banks. In the token-based model, fixed token denominations were used, similar to physical cash in countries like India, and a centralized ledger was employed. However, in the recent phase, the central bank utilized flexible value tokens similar to UTXO and shared ledger functions with intermediaries.The Bank of Japan favored the flexible value token model due to its ability to handle multiple requests simultaneously. However, it acknowledged that this model may require more technical resources compared to the account-based approach. Challenges may arise when implementing additional functions, such as holding limits, while maintaining optimal performance. The European Central Bank (ECB) also noted in a recent report that most payment providers are accustomed to account-based payments and would incur costs to adapt to token-based systems.Another significant aspect explored by the BoJ was how to impose holding limits when users have multiple CBDC balances through different intermediaries. The challenge lies in determining if the overall holding limit has been breached without compromising user privacy.Homomorphic encryptionOne possible solution discussed in the report is the use of homomorphic encryption, which enables computations to be performed on encrypted data without it first needing to be decrypted. That allows for the necessary checks without intermediaries accessing the specific data being checked. Although this solution may slightly increase processing time, it could introduce a higher risk of data inconsistencies.Alternatively, a simpler approach proposed by the central bank is to establish a per-account holding limit and a limit on the number of accounts a single user can hold, rather than imposing global limits. Ideally, users with multiple accounts would have a higher per-account holding limit compared to those with fewer accounts.Phase 3 underwayWith the next pilot phase already underway, the BoJ aims to test the end-to-end process flow and identify challenges related to integrating with external systems. Additionally, they are creating a CBDC Forum to gather input from the private sector, ensuring a collaborative approach to CBDC development.While investigation and research into CBDCs continues, the BoJ has said that it will make a final decision on CBDC implementation by 2026.

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Policy & Regulation·

Nov 23, 2023

Mammoth Foundation signs deal with the Philippines’ AFAB for blockchain business collaboration

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