U.S. District Judge Jed Rakoff in Manhattan sided with the Securities and Exchange Commission in a case stemming from the implosion of the TerraUSD and Luna currencies. A federal judge ruled Thursday that cryptocurrency entrepreneur Do Kwon and his company Terraform Labs violated U.S. law because they failed to complete registration procedures for two digital currencies that collapsed in 2022.

Rakoff also dismissed the parties' summary judgment on the SEC's fraud charges, which is set to go to trial on January 29, 2024. He dismissed SEC charges that the defendants illegally offered securities-based swaps.

A spokesperson for Terraform said the company firmly disagrees with the decision, does not consider its tokens to be securities, and will continue to fight the SEC's "baseless" fraud claims at trial.

The Securities and Exchange Commission had no immediate comment.

Kwon, who is Korean, has also been charged with fraud by U.S. prosecutors in Manhattan. He has been fighting to be extradited to the United States from Montenegro, where he was arrested in March, hours before criminal fraud charges were announced.

Kwon designed TerraUSD, a "stablecoin" designed to maintain an exchange price of $1, and Luna, a more traditional token whose value fluctuates but is closely tied to TerraUSD.

In May 2022, TerraUSD proved unable to maintain its $1 peg, and the two cryptocurrencies lost an estimated $40 billion or more in value. Their collapse also dragged down the value of other cryptocurrencies, including Bitcoin.

The SEC believes that four of the defendants’ crypto-assets, including TerraUSD and Luna, are unregistered securities because they qualify as “investment contracts.”

The SEC also alleged that Terraform and Kwon repeatedly misled investors about the stability of TerraUSD, including claiming that their cryptocurrency would increase in value.

In a 71-page ruling, Rakoff said there was "no real dispute" that the four crypto-assets were securities under the U.S. Supreme Court's 1946 definition of investment contracts.

The Supreme Court ruled in SEC v WJ Howey Co that investing funds in a joint enterprise where the profits are entirely derived from the efforts of others is an investment contract.

But the judge also said reasonable jurors could be divided over whether the defendants intended to defraud investors in multiple statements about Terraform's business.

These include statements about TerraUSD’s temporary inability to maintain the $1 peg in May 2021 and how a popular South Korean mobile payment app is using the Terraform blockchain to settle transactions and support Luna’s value.

Rakoff said the SEC's remedies for the sale of unregistered securities will be determined after the defendants' liability for the fraud claims is resolved.

The cryptocurrency industry has steadfastly denied that its tokens are securities. The industry won a victory in July when another judge in Manhattan federal court said some tokens sold by Ripple Labs did not qualify as securities because buyers did not know whether their money was going to Ripple or a third party.

The case is SEC v Terraform Labs Pte Ltd, U.S. District Court, Southern District of New York, No. 23-01346.