Chai payments app, used to promote Terra ecosystem, didn't use crypto: SEC whistleblower

In a new summary judgment ruling, Judge Jed Rakoff of the U.S. Court for the Southern District of New York has ruled that Do Kwon and the company he co-founded, Terraform Labs, sold four crypto tokens that qualify as unregistered securities: TerraUSD (UST), LUNA -0.83% , wLUNA, and Mirror Protocol (MIR).

Rakoff explained that UST, which was meant to stay pegged to a price of $1 and not generate returns for the holder, still qualified as a security in combination with Anchor Protocol, the system which paid nearly 20% returns to UST holders who staked their coins. The ruling notes that 14 billion out of the 18.5 billion supply of UST tokens were deposited in Anchor by May 2022.

Rakoff did rule in favor of the defendants on one charge, finding that Terra's Mirror Protocol "mAssets," which mirrored real-world assets like stocks for trading, did not constitute security-based swaps, throwing out two charges.

Chai: misrepresentation or misunderstanding?

Judge Rakoff also detailed evidence brought by the SEC that the Chai payments platform , which was often cited by Kwon as a real-world use case of the Terra blockchain for promotional purposes, never ran on the Terra blockchain in the first place. Instead, payments were allegedly settled using traditional methods and then 'mirrored' on the Terra blockchain by a server controlled by Kwon.

This evidence includes previously known information from the SEC's filings along with new revelations, such as a May 2020 email from a Chai employee that states Chai would “process transaction[s] outside [the] blockchain” and then “write a record on the Terra blockchain in parallel.”

The filing also includes statements from an SEC whistleblower, Chai's Chief Product Officer, who was told by a former Terraform employee who joined Chai that "there's no crypto going on within Chai." That whistleblower also claims to have confronted Kwon about Chai's true nature in September 2021, at which point Kwon didn't deny the allegation but rather stated that he did not "give a [expletive] about Chai."

While the evidence appears strong, Judge Rakoff found that "genuine disputes of material fact linger that preclude summary judgment for any party on the fraud claims." The disputes arise from the fact that much of the SEC's evidence comes from whistleblowers whom jurors might find less than credible — especially since the aforementioned whistleblower tried to extort Do Kwon and Terra co-founder/Chai founder Daniel Shin after being fired from Chai, according to the defense. There are also elements of that whistleblower's story that have changed over time, such as whether he had direct knowledge of Chai's systems or merely heard about it from employees.

Terraform's current CEO, Chris Amani, has stated outright that Chai used the blockchain in response to similar accusations of fraud in the past. Terraform Labs did not immediately respond to a request for comment from The Block.