The long-running debate over whether or not cryptocurrencies should be considered securities took another twist last Thursday, December 28. It was then that Judge Jed Rakoff sided with the United States Securities and Exchange Commission (SEC) in its lawsuit against Terraform Labs.
While the summary judgment only covers Terraform’s UST, LUNA, wLUNA and MIR tokens, it represents a significant victory for the SEC. The regulator has asserted that nearly all cryptocurrencies are securities. Also, the agency appears to be gearing up to extend Judge Rakoff’s reasoning to a host of other tokens.
The SEC initially sued Terraform and its CEO Do Kwon in November 2021. The lawsuit came half a year after the Luna stablecoin depegged from the dollar. This wiped out billions of dollars of market capitalization and triggered the start of a long, deep crypto winter.
While the Commission had already made similar claims to the status of Ripple’s XRP token in 2020, SEC vs Terraform Labs, ramped up the regulator’s enforcement campaign. The lawsuit helped shape a stance that has defined its relationship with crypto firms ever since.
Significantly, in its lawsuits against cryptocurrency exchanges like Binance, the SEC has extended its claim to cover most major altcoins. Indeed, the SEC has basically argued that pretty much every cryptocurrency barring Bitcoin and Ethereum are securities.
On Wednesday, January 3, the SEC submitted the Terraform judgment as evidence in its case against Binance. The submission refers to Judge Rakoff’s interpretation of the Howey Test, which is far more in line with the agency’s understanding of the key terms involved than other judgments have been.
In SEC vs. Ripple Labs, Judge Analissa Torres deemed that XRP could be considered a security under certain circumstances, but not under others.
However, Judge Rakoff’s recent decision expressed an understanding of the term “investment contract” more in line with the SEC’s own interpretation.
Terraform argued its distribution of LUNA and MIR tokens shouldn’t be considered securities sales. This was because they only sold directly to sophisticated investors. Judge Rakoff rejected this argument.
“To avail themselves of that exemption,” the court judgment wrote, the defendants would need to also show that they intended LUNA and MIR tokens “to come to rest with’ those sophisticated investors.”
The judgment argued that the firm’s own statements appeared to encourage the development of secondary markets. It added: “Neither Terraform nor its institutional investors had any intent to simply hold onto LUNA or MIR without further trades.”
Commenting on the implications of the decision for its case against Binance, the SEC argued that “the manner of sale of crypto asset securities, including to purchasers on Binance and other crypto trading platforms, does not impact whether a crypto asset qualifies as a security,” an argument that directly contradicts last year’s Ripple ruling.