SEC Whistleblower Reveals Chai Payments App in Terra Ecosystem Didn’t Use Crypto

Four crypto tokens sold by Do Kwon and his co-founded company, Terraform Labs, has been qualified as unregistered securities. 

The tokens in question are TerraUSD (UST), LUNA, wLUNA, and Mirror Protocol (MIR), according to a recent summary judgment ruling by Judge Jed Rakoff of the U.S. Court for the Southern District of New York.

However, the ruling favored the defendants on one charge, dismissing the notion that Terra’s Mirror Protocol “mAssets” constituted security-based swaps.

One significant revelation from the ruling pertains to the Chai payments platform, which Kwon frequently highlighted as a real-world use case of the Terra blockchain for promotional purposes. 

Judge Rakoff presented evidence brought forth by the SEC, indicating that the Chai platform did not operate on the Terra blockchain as claimed.

Instead, payments were purportedly settled using traditional methods and then “mirrored” on the Terra blockchain through a server under Kwon’s control.

The evidence includes an email from a Chai employee in May 2020, 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, disclosed 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 by expressing indifference towards Chai.

There Are Still Disputes of Material Fact

Although the evidence appears compelling, Judge Rakoff acknowledged that genuine disputes of material fact remain, preventing any party from being granted summary judgment on the fraud claims. 

These disputes arise from the credibility of the whistleblowers, as the defense argues that one of them attempted to extort Kwon and Terra co-founder/Chai founder Daniel Shin after being terminated from Chai. 

Furthermore, inconsistencies have been noted in the whistleblower’s account, including whether they had direct knowledge of Chai’s systems or simply heard about them from employees.

Chris Amani, Terraform’s current CTO, has previously stated that Chai did indeed utilize the blockchain, countering the allegations of non-usage of crypto.

Just recently, a federal judge ruled that cryptocurrency entrepreneur Do Kwon and his company Terraform Labs violated US law by failing to register two digital currencies that collapsed in 2022. 

Rakoff also denied summary judgment to both sides on the SEC’s fraud claims, which will proceed toward a scheduled Jan. 29, 2024 trial.