The defense attempted to distinguish between the failure of Terraform’s crypto assets, whose risk profile implied it was well understood by investors, and the acts of fraud alleged by the SEC. “Failure does not equal fraud,” David Patton, Kwon’s attorney, Reportedly told the courtroom in his opening statement.
The defense also sought to undermine the credibility of the SEC whistleblowers it allegedly suggested they were just for the financial reward. The defense dismissed the former Jump employee’s story as rumors and called the Chai whistleblower a disgruntled former employee.
The defense also alleged that Chai had used the Terraform blockchain and argued that the SEC could not prove otherwise without access to the Chai source code. The messages between Shin and Kwon about “fake transactions,” Kwon’s lawyers alleged, were related to a different project entirely.
The jury was ultimately not convinced.
After Kwon and Terraform have been found liable, a fine will be imposed, the amount of which will be confirmed by the judge at a later stage. In the future, they will probably no longer be able to participate in the US securities market. But the implications of the case extend further.
Before the trial, the defense had done so called for dismissal on the grounds that the SEC had misclassified UST, LUNA and other Terraform tokens as securities – a specific class of financial instruments from which investors expect to benefit – and therefore had no jurisdiction. The debate over the proper classification of crypto is at the center of several ongoing legal disputes in the US, between the SEC and Ripple, Coinbase and other companies. The crypto industry has repeatedly accused the SEC of “regulation by enforcement” – of taking legal action instead of setting clear rules of the road – and of exercising jurisdiction over land grabs.
However, at one opinion issued before the trial, Judge Jed Rakoff, who presided over the Kwon case in New York, rejected the arguments for dismissal. The SEC should be given the opportunity to “resolve new and difficult questions posed by emerging technologies where the technologies impact markets that at first glance appear to be securities markets,” he ruled.
The opinion does not establish a rule for other US judges to follow, but in combination with the ruling in favor of the SEC, it sets a precedent of sorts for a crypto organization that has violated US securities laws. “This case is before a respected judge, who is thorough and careful. He is influential,” said Lisa Bragança, an attorney at Bragança Law and former section chief at the SEC. “A statement by him will be cited again and again by fellow judges.”
Terraform had already done that spotted prior to the trial, his intention to appeal an unfavorable verdict, citing the ambiguity over the correct classification of the tokens. Kwon’s absence from the courtroom, which denied him the opportunity to “sit at the counsel table, hear the testimony of witnesses and respond,” Bragança said, could support the appeal.
Absent legislative leadership from the U.S. Congress, Silva says, the classification issue will only be resolved if a crypto case moves through the appellate courts and perhaps ultimately reaches the U.S. Supreme Court. “It’s an evolving area of law,” he says. ‘It crystallizes with every case that arises. It just hasn’t crystallized yet.”
From 7,000 kilometers away in Montenegro, Kwon will have played his role.