U.S. Judge Denies Terraform Labs’ Motion, Allowing SEC’s Crypto Fraud Case to Move Forward

In a significant development for the cryptocurrency industry, U.S. District Judge Jed Rakoff ruled against Terraform Labs’ motion to dismiss a securities fraud lawsuit brought forth by the Securities and Exchange Commission (SEC). The decision clears the path for the SEC’s case against Terraform Labs and its founder, Do Kwon, marking a pivotal moment for the regulatory landscape.

Terraform Labs had argued that the SEC lacked jurisdiction and that its TerraUSD stablecoin did not qualify as an unregistered security. However, Judge Rakoff firmly rejected these defense arguments, refusing to extend the reasoning applied in a recent court decision that favored Ripple Labs to the Terraform case.

The Ripple case had seen a different judge rule that Ripple’s XRP token sales did not violate securities laws as they were made to retail investors on secondary markets. Nonetheless, Judge Rakoff emphasized that the legal Howey test, which governs whether crypto assets are considered securities, does not distinguish between purchasers. This test is crucial in assessing the nature of crypto assets, and the judge declined to draw any distinction based on the manner of sale.

Furthermore, Judge Rakoff pointed out that Terraform Labs’ approach to promoting its crypto assets was bold and all-encompassing. The company engaged in a public campaign that targeted both retail and institutional investors, touting the profitability of their crypto assets and their expertise in maximizing returns on investors’ coins.

The ruling represents a significant victory for the SEC as it intensifies its enforcement actions against crypto companies allegedly involved in unlawful token sales. Judge Rakoff highlighted that the collapse of TerraUSD, losing its dollar peg and wiping out $40 billion in value, made it “plausible” that the token should have been registered as a security.

Additionally, Terraform’s argument that the SEC lacked authority to regulate stablecoins without explicit Congressional authorization was also rejected by Judge Rakoff. He asserted that crypto qualifies as a significant enough issue to warrant the application of the “Major Questions Doctrine.” While recognizing the doctrine’s limitations on agency overreach into major political issues, Judge Rakoff concluded that it does not apply to the crypto asset markets.

With this ruling, the SEC’s case against Terraform Labs moves forward, marking a critical moment in the ongoing efforts to regulate the crypto industry and protect investors from potential fraudulent activities.

Source: Decrypt

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