In a significant development surrounding the ongoing legal battle between Terraform Labs and the U.S. Securities and Exchange Commission (SEC), the United States court has announced that it will render a verdict as Terraform Labs push to dismiss the SEC lawsuit. The decision carries high stakes for both parties involved and has attracted widespread attention from the cryptocurrency and regulatory communities.
Terraform Labs’ legal team contended that UST should not be considered a security as its purpose was primarily geared towards facilitating commerce rather than serving as an investment vehicle.
Terraform Labs’ Defense: Challenging the Interpretation of “Investment Contract” in SEC Lawsuit
During the Thursday night hearing on Terraform Labs motion to dismiss the lawsuit filed by the U.S. SEC, the focal point revolved around the definition of an “investment contract” and its applicability to TerraUSD (UST). Douglas Henkin, an attorney from the Dentons law firm representing Terraform, contended that the SEC sought to undermine the significance of the word ‘contract’ and limit its interpretation to suit their agenda.
A key element of the defense’s core argument centered around the assertion that UST lacked a contractual nature and was purposefully developed for practical applications rather than being positioned as an investment. This line of reasoning echoes similar claims put forth by various token issuers, who have contended that their respective cryptocurrencies should not be classified as securities.
Terraform Labs’ Additional Filings and Defense: Challenging UST Classification as a Security
Prior to Thursday’s hearing, initially slated for 2:00 p.m. ET but later rescheduled to 7:00 p.m. ET, Terraform’s legal representatives submitted supplementary documentation, which included a transcript from a previous hearing held on Tuesday. The earlier hearing focused on the SEC’s motion for a temporary restraining order against Binance US.
During the defense’s argument, they emphasized that while some individuals may have staked UST in the Anchor protocol with the expectation of a potential return, it was crucial to recognize that the token itself should not be classified as a security due to its diverse range of potential uses.
Douglas Henkin argued that due to its intentional pegging to the dollar and stability, UST was specifically designed to remain unaffected by price fluctuations, making it suitable for commerce and consumptive purposes. In response, SEC representative Devon Staren asserted that the evaluation of an investment contract does take into consideration potential consumptive uses.
Legal Battle: SEC Allegations and Terraform Labs’ Dismissal Motion Examined
According to the SEC, the expectations held by investors and the economic realities surrounding the UST token were the primary factors leading to the assertion of securities violations. The SEC representative emphasized that a formal contract was not a necessary requirement for such violations to exist.
Terraform Labs faced a lawsuit earlier this year from the SEC, accusing both the company and its founder, Do Kwon, of misleading investors in the TerraUSD project. The SEC also alleged that Terraform’s Anchor Protocol and LUNA token qualified as securities.
In April, Terraform filed a motion to dismiss the charges, contending that the SEC lacked jurisdiction over the company and Kwon. The motion also raised disputes tied to the Administrative Procedures Act and the major questions doctrine.
During the proceedings, Senior Judge Jed Rakoff from the U.S. District Court for the Southern District of New York questioned whether a major questions issue was at play, noting that Congress intended to grant the SEC broad regulatory authority when drafting the laws governing the agency.
Key Arguments and Closing Remarks in Terraform Labs’ Motion to Dismiss SEC Lawsuit
UST was compared to bitcoin by Henkin, who highlighted the distinction that while a centralized entity manages other assets, UST is governed by a decentralized community through the LUNA token. He emphasized that although Terraform Labs developed the original algorithm, control was eventually transferred to the community.
During the hearing, both Henkin and the judge engaged in discussions using various orange grove comparisons, drawing on the Supreme Court case that forms the foundation of the Howey Test. They explored hypothetical similarities between UST and its current or potential users.
Henkin also referenced the Supreme Court’s recent West Virginia vs. Environmental Protection Agency decision, which emphasized that extraordinary new rules require congressional authorization. He suggested that the decision supports the notion that the SEC’s jurisdiction should be confined to its traditional domain. However, Staren countered by stating that the SEC is merely enforcing existing laws, and the decision in question pertained to preventing extraordinary rulemaking.
Towards the end of the hearing, the SEC emphasized that its analysis focused not solely on the tokens themselves but also on the broader ecosystems in which they operate. Staren clarified that while the SEC did not assert that the Mirror Protocol assets were securities-based swaps, it viewed the transactions involving those assets as falling within its regulatory purview. She reiterated this perspective during her closing remarks, highlighting that the crypto assets alone, including LUNA, were not investment contracts but rather pieces of code.
Judge Rakoff indicated that he would deliver a ruling on the motion to dismiss on or before July 14, providing a timeline for the final decision in the case.
In the ongoing legal battle between Terraform Labs and the SEC, as the former is trying to push and dismiss the SEC lawsuit, the court is set to rule on Terraform Labs’ motion to dismiss the lawsuit within the coming month. The case revolves around the classification of Terra’s UST token as a security.
Terraform Labs argues that UST is designed for commerce rather than as an investment, challenging the SEC’s allegations of securities violations. The court’s decision will have significant implications for the crypto industry, potentially shaping the regulatory landscape surrounding digital assets. Stakeholders eagerly await the ruling, as it will determine the future trajectory of regulatory oversight in the evolving world of cryptocurrencies.
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