Crypto On Trial: U.S. Judge Examines Whether Terraform Labs’ Coins Are Securities

According to a Reuters report, a U.S. judge is considering whether the digital assets created by Terraform Labs were securities in a case brought by the Securities and Exchange Commission (SEC) against the company and its founder, Do Kwon.

Whether the tokens created by Terraform Labs constitute securities is central to the SEC’s fraud case, alleging that the company defrauded investors and sold billions of dollars in unregistered securities.

Terraform Labs’ Coins In The Hot Seat

The SEC’s complaint alleges that Terraform Labs and Kwon misled investors about the stability of TerraUSD and falsely claimed that their crypto tokens would increase in value. 

At a hearing on Thursday, U.S. District Judge Jed Rakoff questioned whether Terraform Labs’ offering of an Anchor protocol, which offered up to 20% returns on deposits of TerraUSD, should be considered a security. 

U.S District Judge Jed Rakoff further claimed:

It is something you created, that only people who had taken this first step could take advantage of. I don’t see why that’s not a securities contract at that point. 

Terraform Labs was behind two cryptocurrencies, TerraUSD and Luna, whose implosion last year roiled crypto markets worldwide. TerraUSD, which was supposed to maintain a 1:1 peg to the U.S. dollar, derived its value through Luna. However, both tokens lost nearly all their value when TerraUSD slipped below its peg in May 2022.

Terraform Labs Fights Back, New Documents Presented

On June 15th, Terraform Labs filed a memorandum in support of its motion to dismiss a lawsuit brought by the Securities and Exchange Commission alleging that Terraform’s sale of a digital asset constituted the sale of unregistered securities.

Terraform’s memorandum argues that the SEC’s lawsuit should be dismissed on several grounds, including that the SEC’s interpretation of what constitutes a security is inconsistent with its prior positions and that the SEC is attempting to regulate the cryptocurrency industry through enforcement actions rather than promulgating clear rules through the notice-and-comment process.

Terraform’s memorandum also cites recent developments that support its arguments, including a hearing in which a federal judge questioned the SEC’s approach to regulating crypto assets through enforcement and suggested that it would be more efficient to establish a consistent policy through rulemaking.

Terraform Labs and Kwon argue that the case should be dismissed because their digital assets do not fit the definition of securities and the SEC lacks authority over the industry. However, the SEC contends that it is simply applying securities laws.

The judge must rule on the motion to dismiss the case by July 14. The outcome of the case could have significant implications for the cryptocurrency industry, as it may clarify the SEC’s authority over digital assets and how they are regulated.

Featured image from Unsplash, chart from TradingView.com