Terraform Labs, the company behind the Terra and Luna cryptocurrencies, has been found to have violated federal securities laws, according to a summary judgment issued by U.S. District Court Judge Jed Rakoff of the Southern District of New York.
The judgment states that Terraform Labs failed to register its cryptocurrencies, LUNA and MIR, as securities, thereby supporting the SEC’s argument. This decision significantly affects the ongoing legal battle between Terraform Labs and the SEC.
Summary judgment in favor of the SEC
In a recent development, Judge Jed Rakoff issued a summary judgment in favor of the U.S. Securities and Exchange Commission (SEC), stating that Terraform Labs had illegally sold unregistered crypto securities. This ruling is crucial in the ongoing legal proceedings against the blockchain company, which had previously denied the SEC’s claims.
The summary judgment explicitly found that Terraform Labs had failed to register its cryptocurrencies, LUNA and MIR, as securities under federal law. This decision aligns with the SEC’s stance that many cryptocurrencies should be classified as securities and fall under its regulatory purview. While this ruling recognizes the SEC’s authority over LUNA and MIR, it does not extend to other tokens within Terraform’s ecosystem.
The summary judgment sets the stage for an eventual trial to determine the extent of Terraform’s securities violations. Judge Rakoff’s decision highlights the illegality of Terraform’s unregistered securities and establishes a framework for the trial. Additionally, the judge denied both parties’ attempts to exclude expert testimony regarding the trading activity that led to the depegging of Terraform’s algorithmic stablecoin, UST, in May 2022.
Expert testimonies admitted
The SEC and Terraform Labs will be allowed to present testimony from their expert witnesses who have analyzed the trading activity leading to UST’s depegging. This testimony is expected to play a pivotal role in the upcoming trial, shedding light on the events that led to the instability of UST and the subsequent legal action taken by the SEC.
However, Judge Rakoff also ruled against Terraform Labs in blocking two of their proposed defense witnesses. One of these witnesses was set to testify about the activity in Terraform’s custodial wallets, while the other would have provided an overview of Terraform’s crypto economy. These decisions limit Terraform’s defense and may have consequences during the trial.
In response to the summary judgment, Terraform Labs strongly disagreed with the decision, asserting that they do not believe UST we should classify stablecoin or other tokens in question as securities. A spokesperson for Terraform Labs stated, “We strongly disagree with the decision and do not believe that the UST stablecoin or the other tokens at issue are securities. Further, the SEC’s fraud claims are not supported by evidence, and we will continue to vigorously defend against those meritless allegations at trial.”
SEC’s legal action
The SEC’s lawsuit against Terraform Labs was initiated earlier this year, following similar complaints filed against several other prominent players in the cryptocurrency industry. The legal action came shortly after the depegging of Terraform Labs’ algorithmic stablecoin, UST, which sent shockwaves through the crypto industry.