A U.S. judge is currently examining whether the digital assets created by Terraform Labs should be considered securities in a case brought against the company and its founder, Do Kwon, by the Securities and Exchange Commission (SEC) (source). The SEC alleges that Terraform Labs defrauded investors and sold billions of dollars in unregistered securities, making it crucial to determine whether the tokens in question are securities.

The SEC’s complaint revolves around Terraform Labs and Kwon misleading investors about the stability of TerraUSD and falsely claiming that their crypto tokens would increase in value.

Terraform Labs’ Coins In The Hot Seat

During a recent hearing, U.S. District Judge Jed Rakoff questioned whether Terraform Labs’ offering of the Anchor protocol, which promised up to 20% returns on deposits of TerraUSD, should be classified as a security. Judge Rakoff remarked that since it is something created by Terraform Labs that only people who had taken the first step could benefit from, it could potentially be considered a securities contract (source).

Terraform Labs was responsible for two cryptocurrencies, TerraUSD and Luna, which experienced a significant decline last year, causing ripples in the crypto markets worldwide. The value of TerraUSD, which was intended to have a 1:1 peg to the U.S. dollar, relied on Luna. However, both tokens lost most of their value when TerraUSD slipped below its peg in May 2022.

Terraform Labs Fights Back, New Documents Presented

Terraform Labs has recently filed a memorandum in support of its motion to dismiss the lawsuit brought by the SEC. The memorandum argues that the SEC’s interpretation of a security is inconsistent with its previous positions and that the agency is trying to regulate the cryptocurrency industry through enforcement actions rather than clear rules (source). Terraform Labs also highlights recent developments, including a federal judge questioning the SEC’s approach to crypto asset regulation through enforcement and suggesting the establishment of consistent policies through rulemaking.

Terraform Labs and Kwon argue that their digital assets do not fall under the definition of securities and that the SEC lacks authority over the industry. On the other hand, the SEC asserts that it is simply applying securities laws.

The judge is expected to rule on the motion to dismiss by July 14. The outcome of the case may have significant implications for the cryptocurrency industry, providing clarity on the SEC’s authority over digital assets and their regulation.

Featured image from Unsplash, chart from TradingView.com