By
Steve Muchoki
April 26th, 2024
The implications of this judgment are significant for both Terraform and the broader ecosystem.
Terraform Labs, and its founder, Do Kwon, are facing a major setback as US District Judge Jed Rakoff has reportedly ruled against their motion to dismiss fraud allegations brought forth by the US Securities and Exchange Commission (SEC).
SEC Allegations against Terraforms and Its Ramifications
The SEC alleges that Terraform and Do Kwon, were involved in fraudulent activities related to the sale of two digital assets. According to the SEC, these assets were sold as investment contracts to the public without registering them as securities, which is a violation of extant Federal laws.
The SEC’s complaint alleges that Terraform and Kwon engaged in fraudulent practices by misleading investors about the stability of TerraUSD (UST) and making false promises regarding the potential appreciation of the firm’s crypto tokens.
According to the SEC, Terraform and Kwon misled investors by claiming that UST, the algorithmic stablecoin, would remain pegged to the US dollar at a 1:1 ratio and that the firm’s crypto token, including LUNA, would appreciate in value over time.
The SEC, however, contends that these commitments were not kept, as UST eventually fell below its peg to the US dollar in May 2022. This failure to sustain the promised stability resulted in considerable losses for investors who had relied on Terraform and its founder’s promises.
The Implication of Judges’ Ruling
Judge Rakoff’s ruling allowing the SEC to proceed with these allegations signals that the court finds sufficient evidence or merit in the regulator’s complaint to warrant further examination and legal action. The ruling clears the way for the case to proceed, giving the regulatory body the opportunity to present its evidence and argument against Terraform and Kwon in court.
The implications of this judgment are significant for both Terraform and the broader ecosystem. If the SEC successfully establishes its charges in court, it might have far-reaching implications for how algorithmic stablecoins are produced, sold, and regulated in the future.
The verdict may potentially have an influence on investor confidence in the crypto sector, encouraging additional inspection and due research from investors before engaging in similar initiatives.
The Ongoing Digital Assets Securities Debate
Meanwhile, the recent court ruling involving Ripple Labs Inc and the sale of its associated token, XRP, has sparked a debate between Judge Rakoff and Judge Analisa Torres.
In the Ripple Labs case, Judge Torres ruled that sales of XRP on public crypto exchanges do not constitute securities. However, in the case involving Terraform and its algorithmic stablecoin TerraUSD (UST), Judge Rakoff took a different perspective.
He disagreed with the notion that the identity of the seller, in this case, Terraform, should be a determining factor in deciding whether a reasonable investor would interpret the statements made by the company or its representatives as promises of profit.
According to Rakoff, the focus should be on the content of the statements and the expectations they create among investors, rather than the technical classification of the crypto.
