In a highly anticipated legal battle, Terraform Labs, a prominent blockchain technology firm, is awaiting a decisive ruling from a U.S. court concerning its motion to dismiss a lawsuit filed by the U.S. Securities and Exchange Commission (SEC).
Legal Battle Erupts as Terraform Labs Challenges SEC’s Classification of TerraUSD (UST) as a Security
Terraform Labs’ legal team presented arguments during a hearing regarding the U.S. Securities and Exchange Commission (SEC) lawsuit, asserting that the TerraUSD (UST) stablecoin should not be considered a security.
The heart of the debate centered around the definition of an “investment contract” and whether it applies to UST. The defense, represented by Douglas Henkin from Dentons law firm, emphasized the significance of the word “contract” in the definition, which the SEC sought to eliminate.
The defense argued that UST was designed for practical purposes and commerce, not as an investment. They highlighted that UST’s value remains stable, pegged one-to-one with the U.S. dollar. The SEC, however, contended that the analysis of an investment contract should consider both investment and non-investment uses.
The SEC’s lawsuit against Terraform Labs, filed earlier this year, accuses the company and its founder, Do Kwon, of misleading investors in the TerraUSD project. However, the SEC also claims that Terraform’s Anchor Protocol and LUNA token should be classified as securities.
Terraform Labs Seeks Dismissal of Charges, Challenging SEC’s Jurisdiction
In April, Terraform Labs made a compelling argument to dismiss the charges against them, contending that the U.S. Securities and Exchange Commission (SEC) lacks jurisdiction over both the company and its founder, Kwon. Their stance was grounded in concerns related to the Administrative Procedures Act and the major questions doctrine.
During the proceedings, Senior Judge Jed Rakoff, the U.S. District Court for the Southern District of New York raised doubts about the validity of major questions, suggesting Congress intended to give the SEC broad regulatory authority in its laws.
In support of their case, Terraform’s attorney, Henkin, compares UST to Bitcoin, highlighting decentralized control via the LUNA token. Henkin further emphasized that although Terraform initially developed the algorithm, it was subsequently handed over to the community.
Throughout the hearing, Henkin and the judge engaged in a discussion exploring hypothetical scenarios, invoking the Supreme Court case that forms the foundation of the Howey Test, intending to identify potential similarities between UST and its current or future uses.
Henkin also referenced the recent West Virginia vs. Environmental Protection Agency decision by the Supreme Court, which underscores the need for congressional authorization when federal agencies go beyond their traditional mandates. However, SEC representative Staren argued that the decision primarily prevents agencies from introducing extraordinary new rules, asserting that the SEC is simply enforcing existing laws.
SEC Argues Existing Laws Enforced Despite Supreme Court Decision; Judge to Rule by July 14
Towards the conclusion of the hearing, the SEC underscored that their analysis extends beyond the tokens themselves and encompasses the broader ecosystems they are part of.
Staren clarified that while the SEC is not claiming the Mirror Protocol assets themselves are securities-based swaps, they are closely scrutinizing the transactions involving these assets. Staren reiterated this stance during her closing remarks, emphasizing that “these crypto assets alone are not investment contracts,” emphasizing that LUNA is merely a piece of code.
Judge Rakoff announced his intention to issue a ruling on the motion to dismiss on or before July 14, marking a pivotal milestone in the ongoing legal proceedings between Terraform Labs and the SEC.
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