A judge in the United States considered on Thursday whether the cryptocurrencies created by Terraform Labs were securities. The failed blockchain firm and its founder, Do Kwon, have asked the court to dismiss a case filed by the U.S. Securities and Exchange Commission (SEC) alleging that they defrauded investors whom they sold unregistered securities.
Judge Reviews Status of the Digital Assets Sold by Terraform in SEC’s Fraud Case
A judge in New York has considered whether the digital coins issued by Terraform Labs were securities during a hearing in the SEC’s case against the crypto company and its South Korean co-founder and CEO Kwon Do-Hyung, better known as Do Kwon.
Earlier this year, the U.S. securities regulator charged the crypto entrepreneur and his company with defrauding investors and selling billions of dollars’ worth of digital assets that the commission deems unregistered securities.
The value of the cryptocurrencies in question, stablecoin terrausd and the token luna, collapsed in May, 2022, causing the crash of the Terraform ecosystem which had a domino effect in the crypto markets and space. An estimated 200,000 people had bought the coins.
In the complaint, the SEC maintains that the company and its founder misled investors about the stability of the U.S.-dollar pegged stablecoin, Reuters noted in a report. They also claimed the tokens would increase in value, the regulator alleges.
Terraform Labs and Do Kwon want U.S. District Judge Jed Rakoff in Manhattan to dismiss the SEC’s case, arguing that the platform’s digital currencies do not fit the existing definition of securities in the U.S. and that the SEC lacks authority over the crypto industry.
On Thursday, Rakoff questioned whether Terraform’s offering of a so-called Anchor protocol, which promised up to 20% returns on terrausd deposits, shouldn’t be considered a security. He was quoted elaborating:
It is something you created, that only people who had taken this first step could take advantage of. I don’t see why that’s not a securities contract at that point.
Judge to Rule on Terraform’s Request for Case Dismissal in the Coming Weeks
Judge Rakoff said he will rule on the motion to dismiss the case in the U.S. District Court, Southern District of New York, by July 14. During the hearing, SEC Attorney Devon Staren insisted the commission is “not doing anything new” but “simply applying the securities laws.”
The SEC took legal action against major crypto exchanges Binance and Coinbase last week, arguing in the lawsuits that a number of tokens listed by the two trading platforms represent unregistered securities.
Do Kwon, who disappeared after the crash of Terraform’s cryptocurrencies last year, was arrested in Montenegro on March 23 of this year while attempting to leave for Dubai on a fake Costa Rican passport. He is standing trial in the small Balkan nation for traveling on false documents. Both South Korea and the United States seek his extradition.
What outcome do you expect from the SEC case against Terraform Labs and Do Kwon in the U.S.? Tell us in the comments section below.
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