A federal judge in the US gave a mixed verdict in the case made by the Securities and Exchange Commission (SEC) against Terraform Labs and its former CEO, Do Kwon. This is a major legal development.
The case is very important to the discussion about how to classify and regulate cryptocurrencies because it is based on claims that Terraform Labs and Kwon sold and offered unregistered stocks in a way that was against the law.
District Court Judge Jed Rakoff ruled in favor of the SEC on some important parts of the case on December 28. The court agreed with the claim that Terraform Labs and Kwon did offer and sell two cryptocurrencies, LUNA and MIR, as unregistered stocks. This ruling agrees with what the SEC has said for a long time: that many cryptocurrencies are securities and are therefore regulated by the SEC.
The judge did, however, give the SEC a loss on another important point. The SEC said that Terraform Labs and Kwon were engaged in providing and carrying out deals involving security-based swaps using the Mirror Protocol, which lets “mAssets” be made.
The prices of these blockchain assets are the same as the prices of assets in the real world. The court didn’t agree with the SEC that these securities were security-based swaps, though, saying that they didn’t meet the legal meaning of such.
Judge Rakoff made the decision about LUNA based on something Kwon said in the past that made it sound like LUNA holders could quietly benefit from his work, which is what the Howey test says should happen. As a legal guideline, this test is used to see if certain deals are actually financial contracts and, by extension, securities.
In the same way, the court decided that MIR tokens also met the Howey test. The judge thought that people who bought MIR tokens were led to believe that they would mostly make money from Terraform Labs’ work on creating and running the Mirror Protocol.
The court also made decisions about expert evidence. It turned down Terraform Labs and Kwon’s request to exclude the testimony of two SEC experts, but it also turned down the SEC’s request to exclude the testimony of the defense expert.
The court has made its decision about the securities part, but it has not yet made a decision on the SEC’s fraud claims against Kwon and Terraform Labs. As of 2022, the SEC says Kwon was in charge of a fake cryptocurrency plan that cost the market at least $40 billion. The fraud charges will be decided by a jury trial. The jury will be chosen on January 24, 2024.
This case is an important part of the current discussion about how to regulate cryptocurrencies and how they should be treated under securities law. People will be paying close attention to the results of the upcoming fraud trial by a jury, as they could have big effects on the crypto business and the rules that govern it.
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