SEC vs Binance: What Impact Could Terraform Case Have?
What implications can Terraform case have in SEC vs. Binance? l Source: Alex Wong/Getty Images
Key Takeaways
- The Securities and Exchange Commission’s win against Terraform Labs strengthens its legal arguments in ongoing disputes with crypto exchanges.
- The Terraform case sets a precedent for classifying digital assets as securities under the Howey Test.
- The SEC’s actions create uncertainty for the crypto industry regarding asset classification and exchange regulations.
The victory of the US Securities and Exchange Commission (SEC) against Terraform Labs is being used to strengthen its stance in legal disputes with crypto exchanges such as Coinbase and Binance.
The SEC alleges that Terraform improperly offered securities through its stablecoin offerings and the Mirror Protocol. This assertion supports similar allegations in the ongoing cases against the two exchanges. Both platforms received allegations of facilitating the trading of unregistered securities.
The Terraform Case
Judge Jed Rakoff, presiding over the SEC’s lawsuit against Terraform Labs and former CEO Do Kwon, ruled in favor of the regulatory agency last December, granting a summary judgment.
The judgment affirms both Kwon and Terraform engaged in offering and selling unregistered securities, particularly focusing on LUNA and MIR tokens. The SEC argued that Kwon and Terraform conducted transactions involving unregistered security-based swaps and perpetrated fraudulent schemes to deceive investors.
In his ruling, Rakoff granted summary judgment for the SEC on Count IV of the Amended Complaint, concerning the defendants’ unregistered offers and sales of LUNA and MIR, violating Sections 5(a) and 5(c) of the Securities Act. The judge emphasized that UST, LUNA, wLUNA, and MIR qualify as securities. This is because they meet the criteria of investment contracts according to the Howey test, which he deemed a definitive interpretation of the law.
Additionally, Rakoff determined that UST, wLUNA, LUNA, and MIR tokens constitute investment contracts under the Howey test. The trial will now address the SEC’s fraud allegations against Terraform and Kwon, following the agency’s charges filed in February.
SEC vs Binance
In a related legal action against Binance , the SEC seeks to utilize the Terraform Labs ruling to reinforce its case. In a separate submission, the agency urged a court to consider the Terraform judgment when evaluating Binance’s motions to dismiss the lawsuit.
The filing stated: “The court’s assessment of the Terraform defendants’ ‘stablecoin’ UST is particularly pertinent to this court’s review of Defendants’ arguments regarding Binance’s ‘stablecoin’ BUSD, as well as Defendants’ offerings such as BNB Vault and Simple Earn programs.”
In November, Binance and its former CEO, Changpeng Zhao, settled on criminal charges with the Department of Justice. They admitted guilt to violating the Bank Secrecy Act, failing to register as a money-transmitting business, and enabling sanctions evasion. The company agreed to an unprecedented penalty of $4.3 billion. And committed to appointing a new CEO and an external monitor.
The SEC’s lawsuit against Binance, alleging operation of an unregistered securities exchange, remains ongoing. The agency filed suit against the major exchange in June 2023, asserting that Binance and its affiliates deceived customers and diverted funds to a separate investment fund owned by Zhao. Over the past seven months, Binance has filed numerous motions seeking dismissal of the case.
Latest Developments On Terra Founder
Terraform Labs co-founder Do Kwon‘s extradition to South Korea has hit a snag following a legal challenge issued by Montenegro’s chief prosecutor.
The Office of the Supreme State Prosecutor in Montenegro argued that the decision by the High Court to extradite Kwon to South Korea, instead of the United States, exceeded its jurisdictional boundaries. It also said it was conducted through “abbreviated proceedings.”
Montenegro finds itself entangled in a dispute between the US and South Korea that began about a year ago. In 2023, Kwon and his associate, Han Chang-joon, were apprehended for attempting to use counterfeit Costa Rican passports while traveling to Dubai.
Kwon’s arrest came six months after Interpol issued a “red notice” for him following the $40 billion collapse of Terraform Labs and the Terra ecosystem.
Facing criminal charges in both the US and South Korea, Kwon has been contesting extradition since his arrest. He appealed against several court rulings with mixed success. With Montenegro extraditing Han to South Korea in February, Kwon appeared poised to follow suit.
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