Terraform Labs Sold Unregistered Securities, Says Judge

Earlier this year, the SEC’s crusade against cryptocurrencies seemed to be coming to a head after Judge Analisa Torres sided mostly in favor of Ripple, who ruled that XRP is, broadly speaking, not a security and that its purchase could only be considered an investment contract in certain circumstances.

The two parties, however, are still duking it out, with a final decision expected in early 2024.

Terraform Labs Attempted to Capitalize on Ripple’s Headwinds

Given the success of Ripple in its landmark case, Terraform Labs attempted to use a similar defense in its own legal battle. Judge Rakoff, however, was not convinced.

According to court transcripts, Judge Rakoff granted a summary judgement (one without a full trial) in favor of the SEC regarding TERRA and LUNA, both of which are to be considered securities going forward. Terraform Labs can still appeal this decision.

“There is no genuine dispute. […] They are investment contracts. […] The defendants want to cast aside decades of settled law. Howey’s definition of ‘investment contract’ was and remains a binding settlement of the law, not dicta.”

Mirror Tokens Spared By Decision

The SEC’s lawsuit against Terraform Labs also attempted to categorize MIR tokens as securities. They were a part of Do Kwon’s Mirror ecosystem, which was an attempt to (sic) mirror non-crypto assets on the blockchain, a practice more or less analogous to trading wheat and other commodities on a stock exchange.

Judge Rakoff ruled that these tokens passed the Howey Test, as any profit garnered by purchasing and holding MIR tokens would be due to the performance of the assets they were tied to, not due to Terraform Labs’ efforts, according to Bloomberg.

“In other words, that MIR passes the Howey test with flying colors.”

The judge also took into account the testimony of former and current Jump Trading employees.

Jump Trading, a firm that has not been accused of any wrongdoing, was heavily invested in the Terraform Labs ecosystem and allegedly risked $200 million to restore TerraUSD’s dollar peg.

The testimony of the unnamed whistleblowers did not, however, affect the ruling, although Judge Rakoff pointed out that their depositions could be revisited at a later date.

“(The evidence) is compelling but circumstantial, relying in large part on the testimony of Jump whistleblowers whose credibility the jury will need to determine.”

The jury trial against Terraform Labs is due to commence in January.


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