The SEC accused Terraform Labs of selling cryptocurrencies without registering them as securities and deceptively promoting their utility.
In a high-stakes decision for the cryptocurrency industry, United States District Judge Jed Rakoff on Monday denied Terraform Labs’ motion to dismiss the securities fraud lawsuit filed against it by the Securities and Exchange Commission. The decision allows the SEC’s case against Terraform Labs and its founder Do Kwon to move forward, rejecting defense arguments that the agency lacked jurisdiction and that Terraform’s TerraUSD stablecoin did not qualify as an unregistered security.
The implications of this ruling are significant for both Terraform and the broader ecosystem. Terraform Labs and its founder, Do Kwon, are facing a major setback in the wake of Judge Rakoff’s decision.
SEC Accusations Against Terraform and Its Ramifications
The SEC alleges that Terraform and Do Kwon were involved in fraudulent activity related to the sale of two digital assets. According to the SEC, these were sold to the public as investment contracts without registering them as securities, in violation of applicable federal law.
The SEC complaint alleges that Terraform and Kwon engaged in fraudulent practices by misleading investors about the stability of TerraUSD (UST) and making false promises about the potential appreciation of the firm’s crypto tokens.
According to the SEC, Terraform and Kwon misled investors by claiming that UST, the algorithmic stablecoin, would remain pegged to the US dollar at a 1:1 ratio and that the firm’s crypto token, including LUNA, would increase in value with time.
However, the SEC maintains that these commitments were not met, as UST finally fell below its parity to the US dollar in May 2022, which resulted in considerable losses for investors who had relied on Terraform and its founder’s promises.
Implications of the Judge’s Decision
Judge Rakoff’s ruling allowing the SEC to proceed with these claims indicates that the court finds sufficient evidence or merit in the regulator’s complaint to warrant further examination and legal action.
The ruling clears the way for the case to proceed, giving the regulator an opportunity to present its evidence and arguments against Terraform and Kwon in court.
The implications of this judgment are significant for both Terraform and the broader ecosystem. If the SEC successfully settles its charges in court, it could have far-reaching implications for how algorithmic stablecoins are produced, sold, and regulated in the future.
The verdict can potentially influence investor confidence in the cryptocurrency sector, encouraging additional scrutiny and due diligence by investors before undertaking similar initiatives.
Current Debate on Digital Asset Values
Meanwhile, the recent court ruling involving Ripple Labs Inc. and the sale of its associated token, XRP, has sparked a debate between Judge Rakoff and Judge Analisa Torres.
In the Ripple Labs case, Judge Torres ruled that XRP sales on public crypto exchanges do not constitute securities. However, in the case involving Terraform and its algorithmic stablecoin TerraUSD (UST), Judge Rakoff took a different perspective.
He disagreed with the notion that the identity of the seller, in this case, Terraform, should be a determining factor in deciding whether a reasonable investor would interpret statements made by the company or its representatives as promises of earnings.
According to Rakoff, the focus should be on the content of the statements and the expectations they create among investors, rather than the technical classification of crypto.
The lawsuit now moves to the discovery phase unless it is dismissed on appeal, or a settlement is reached. The SEC seeks restitution of ill-gotten investor funds, in addition to imposing civil penalties.
By Audy Castaneda
