In July, lawyers for Terraform Labs challenged the regulator’s suit, using the court’s reasoning in ruling on the Ripple case. In the Ripple litigation, the court ruled that selling XRP to retail investors did not violate securities laws because users were buying the coins on the secondary market.
However, Judge Jed Rakoff refused to extend that reasoning to the Terraform Labs case. He explained that the Howey test, which determines whether an asset qualifies as a security, does not distinguish between purchasers of. Therefore, the court declined to distinguish between UST steblecoins based on the manner in which they are sold. Rakoff ruled that the TerraUSD stablecoin, which lost its peg to the dollar last year and plummeted in value, wiping out about $40 billion in the market, was a security that should have been registered.
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“Defendants launched a public campaign to induce retail and institutional investors to purchase these cryptoassets by publicizing their profitability. Issuers claimed managerial and technical skills that enabled Defendants to maximize returns on investors’ investments. Simply put, buyers in the secondary market had just as good a reason to believe that the defendants would use those investments to make a profit on their behalf,” the judge explained.
The court also rejected defense arguments that the SEC lacks the authority to regulate stablecoins without congressional authorization. The court found cryptocurrencies to be a serious enough problem to justify application of the Core Issues Doctrine. The doctrine limits the agency’s undue influence on major policy issues, but it does not apply to cryptoasset markets, Rakoff added.
The judge said the SEC provided ample evidence that Terraform and its founder Do Kwon had motives to mislead investors about the utility of UST.
Recall that in April, South Korean law enforcement authorities seized the property of former Terraform Labs employees worth about 200 billion won ($153.6 million).