Recently, Judge Jed Rakoff of the U.S. Court for the Southern District of New York issued a summary judgment ruling, declaring that four crypto tokens sold by Do Kwon and his co-founded company, Terraform Labs, are unregistered securities. The tokens in question include TerraUSD (UST), LUNA, wLUNA, and Mirror Protocol (MIR). However, the ruling did dismiss the notion that Terra’s Mirror Protocol “mAssets” constituted security-based swaps.
Judge Rakoff’s Ruling and the Chai Payments Platform
One significant revelation from the ruling is related to the Chai payments platform, which Kwon often highlighted as a real-world use case of the Terra blockchain for promotional purposes. Judge Rakoff presented evidence from the SEC, which indicated that the Chai platform did not operate on the Terra blockchain as claimed. Instead, payments were settled using traditional methods and then “mirrored” on the Terra blockchain through a server controlled by Kwon.
An email from a Chai employee in May 2020 further supported this evidence, stating that Chai would process transactions outside the blockchain and only write a record on the Terra blockchain in parallel. Additionally, a whistleblower, who served as Chai’s Chief Product Officer, revealed that a former Terraform employee who joined Chai had informed them that “there’s no crypto going on within Chai.”
The whistleblower claims to have confronted Kwon about Chai’s true nature in September 2021, to which Kwon allegedly responded with indifference. However, Judge Rakoff acknowledged that genuine disputes of material fact exist, particularly regarding the credibility of the whistleblowers. The defense argues that one of the whistleblowers attempted to extort Kwon and Terra co-founder/Chai founder Daniel Shin after being terminated from Chai. Inconsistencies in the whistleblower’s account have also been noted, including whether they directly witnessed Chai’s systems or heard about them from employees.
Chris Amani, Terraform’s current CTO, has previously stated that Chai did indeed utilize the blockchain, contradicting the allegations that crypto was not being used.
Violation of US Law and the Future Trial
In a separate ruling, a federal judge concluded that Do Kwon and Terraform Labs violated US law by failing to register two digital currencies that ultimately collapsed in 2022. Rakoff also denied summary judgment to both the defendants and the SEC on fraud claims, indicating that these claims will proceed to trial on January 29, 2024.
