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SEC Goes After Terra & Do Kwon After Judge Dismisses Ripple’s Win: Is There No Precedent?

Published August 1, 2023 11:38 AM
Omar Elorfaly
Published August 1, 2023 11:38 AM

Key Takeaways

  • The SEC urged a US District judge to move on with the Terra case
  • Uncertainty towards digital assets rises as federal judges disagree
  • Korean courts don’t agree with US courts

US District Judge Jed Rakoff ruled  in favor of the US Securities and Exchange Commission (SEC) to move on with litigation against Terraform Labs and founder Do Kwon. The company and its founder attempted earlier to dismiss the case filed by the SEC, claiming that digital assets sold by the platform are not securities, piggybacking on the recent XRP win.

False and Materially Misleading Statements

Last month, Terraform Labs and its founder Do Kwon filed a motion to dismiss the lawsuit filed against them by the SEC. Among the many charges filed against Do Kwon by the SEC is one concerning the sale of UST, LUNA, and wLUNA, which the regulating body sees as unregistered securities.

As a result of the recent XRP/Ripple case, in which Judge Torres ruled that XRP is indeed not a security as it doesn’t provide a guarantee of profit, Do Kwon and Terra took the chance to claim that UST, LUNA, and wLUNA are not securities as they were not sold in the same volumes as XRP was.

Consequently, Judge Jed Rakoff offered the chance for both the defendants and the plaintiffs to provide additional documents on the matter. The aim was to address the aforementioned motion on whether the case should be dismissed.

“After full briefing, the Court, on June 14, 2023, heard oral argument on the motion. Having now carefully considered the parties’ arguments, the Court concludes that because, according to the well-pleaded allegations of the complaint, the defendants used false and materially misleading statements to entice U.S. investors to purchase and hold on to defendants’ products, and because those products were unregistered investment-contract securities that enabled investors to profit from the supposed investment activities of defendants and others, the motion to dismiss must be denied,” read Judge Rakoff’s recent ruling.

Increased Uncertainty

Judge Rakoff’s ruling now poses the question of whether XRP was just a one-off. Seeing that Do Kwon’s motion does follow XRP’s path of removing the ‘securities’ label put on their digital tokens on the SEC, will Rakoff’s and Torres’ rulings lead to a judiciary clash?

Terra and Do Kwon already received support from the South Korean courts. The South Korean government supports Terra’s claim, citing that LUNA is not a security. The court sees that the sales of LUNA and MIR were too minuscule to be considered securities. Instead, South Korean authorities see that sales of LUNA and MIR were just a way to encourage participation in the Terra ecosystem.

A lot is currently riding on the XRP case. Several players in the market, including Coinbase, are currently optimistic about the outcome of their own SEC cases, seeing that Judge Analisa Torres’ rule does refute the SEC’s claim that any token besides Bitcoin, Ethereum, Litecoin, and Bitcoin Cash is a security.

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