In a major development for the cryptocurrency industry and Ripple, a US judge overseeing the lawsuit filed by the SEC against Terraform Labs has rejected the firm’s request to dismiss the lawsuit. The July 31 ruling by New York Southern District Court Judge Jed Rakoff allows the SEC’s lawsuit against the company and its founder, Do Kwon, to continue. The SEC had accused Terraform Labs of orchestrating a multibillion-dollar crypto-asset securities scam. Here are the details…
Critical decision for LUNA and many altcoins
The court’s decision comes after legal representatives of Terraform Labs requested in April to dismiss the case, arguing that the SEC has no jurisdiction over the company and its founder. Representatives also opposed the agency’s view that certain tokens are securities, including the Mirror Protocol (MIR), Terra Classic (LUNC), and TerraUSD Classic (USTC). In his decision, Judge Rakoff emphasized that for the case to be dismissed, all allegations must be considered true and all reasonable inferences must be made in favor of the SEC. He referred to the “Big Questions Doctrine”, rejecting Terraform Labs’ argument that the SEC has no authority to issue crypto tokens without Congressional authorization. So the judge said that the SEC’s claim regarding the unregistered sale of Terra LUNA is true. Hence, he confirmed that the case will proceed.
The judge also devoted several pages to the analysis of the Howey test, a legal test used to determine whether certain transactions qualify as investment contracts. Judge Rakoff noted that no formal contract is required to meet the test, and that the tokens themselves can be considered investment contracts in court discussions. More importantly, Judge Rakoff disagreed with the earlier decision in the Ripple-SEC case by US District Judge Analisa Torres.
How will the Ripple case be affected?
As we reported on Cryptokoin.com, Judge Torres in the Ripple case ruled on July 13 that sales of XRP in the secondary markets are not investment contracts and do not violate securities laws. However, Judge Rakoff rejected the approach of distinguishing between primary and secondary market buyers. He stated that the court did not recognize such distinctions. This decision could have implications for other cases involving cryptocurrency tokens and their classification as securities.
While Judge Rakoff’s decision in the Terraform Labs-SEC case will not directly affect the Ripple-SEC case, it highlighted the complexity of legal interpretations in the cryptocurrency space. These cases show that issues related to token classification and securities regulations are open to different interpretations and may change over time. In addition, it turned out that the SEC presented the Ripple case judgment to Judge Rakoff prior to its decision and advised him not to abide by it. The SEC also stated its intention to appeal the Ripple decision, noting that legal challenges and controversies surrounding the regulation of cryptocurrencies remain.
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