U.S. Court to Decide Terraform Labs’ Motion to Dismiss SEC Lawsuit in One Month

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Terraform Labs’ legal team presented the argument that UST should not be classified as a security since its primary purpose is facilitating commercial transactions, rather than serving as an investment vehicle.

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During a recent hearing on Terraform Labs’ motion to dismiss the lawsuit filed by the U.S. Securities and Exchange Commission (SEC), the central question revolved around the definition of an “investment contract” and its applicability to TerraUSD (UST). Douglas Henkin, an attorney from Dentons law firm representing Terraform, contended that the SEC sought to render the word “contract” meaningless. He argued that the SEC’s intention was to eliminate the significance of this crucial term in their case.

As part of their core argument, the defense emphasized that TerraUSD (UST) lacked a contract and was primarily created for practical purposes rather than as an investment. This echoes the stance taken by various token issuers who have contended that their respective cryptocurrencies should not be classified as securities. They assert that these digital assets serve practical functions rather than functioning as traditional investment instruments.

Before Thursday’s hearing, which was initially planned for 2:00 p.m. ET but later rescheduled for 7:00 p.m. ET, Terraform’s lawyers submitted additional documents. These included a transcript from a hearing that took place on Tuesday, addressing the U.S. Securities and Exchange Commission’s motion for a temporary restraining order against Binance.US. The legal team filed these documents as part of their preparation for the hearing.

The defense argued that although certain individuals may have staked UST in the Anchor protocol with the expectation of earning a return, the token itself should not be categorized as a security. They highlighted its potential for various other purposes, stating that UST is intentionally designed to maintain a one-to-one peg with the dollar and minimize fluctuations. According to the defense, this stability is primarily intended for commercial transactions, making it a token with consumptive use rather than an investment instrument.

According to SEC representative Devon Staren, the evaluation of whether something qualifies as an investment contract considers the potential for consumptive uses. Staren explained that the SEC’s assertion of securities violations in relation to the UST token was based on investors’ expectations and the economic realities surrounding it. These factors were taken into account to determine whether the UST token fell within the scope of securities regulations.

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Also Read: Prosecutor Warns of Potential Dual Imprisonment for Do Kwon in US and South Korea

“We believe that a formal contract is not a requirement,” she stated.

Earlier this year, the SEC filed a lawsuit against Terraform Labs, accusing the company and its founder, Do Kwon, of deceiving investors in the TerraUSD project. The SEC also alleged that Terraform’s Anchor Protocol and LUNA token constituted securities.

In April, Terraform submitted a motion to dismiss the charges, arguing that the SEC lacked jurisdiction over both the company and Kwon. They raised concerns related to the Administrative Procedures Act and the major questions doctrine.

Senior Judge Jed Rakoff from the U.S. District Court for the Southern District of New York raised doubts about the major questions issue during the proceedings. He indicated that Congress had intended to grant the SEC extensive regulatory authority while formulating the laws governing the agency.

Henkin drew a comparison between UST and bitcoin, highlighting that unlike other assets that are overseen by a centralized entity, UST is governed by a decentralized community through the LUNA token. He pointed out that while Terraform Labs initially developed the original algorithm, it was subsequently handed over to the community for management.

According to Henkin, this decentralized nature is a distinguishing characteristic of UST, similar to how bitcoin operates.

Henkin and the judge engaged in a discussion involving several comparisons related to orange groves, referring to a Supreme Court case that forms the basis of the Howey Test. They explored hypothetical scenarios to find resemblances between UST and its current or potential uses. The aim was to examine whether UST exhibited similar characteristics that could be evaluated under the legal framework established by the Howey Test.

The attorney representing Terraform Labs referred multiple times to a recent Supreme Court decision in West Virginia vs. Environmental Protection Agency. The decision stated that major actions undertaken by federal agencies, including the EPA, must be authorized by Congress if they go beyond the scope of the agency’s traditional responsibilities. However, Staren from the SEC argued that the decision only restricts agencies from establishing exceptional new regulations.

She emphasized that the SEC is solely enforcing existing laws rather than creating new ones.

Towards the conclusion of the hearing, the SEC underscored that its analysis focused not only on the tokens themselves but also on the larger ecosystems in which they operate. Specifically mentioning Mirror Protocol assets, Staren clarified that the SEC’s allegations did not pertain to considering the assets as securities-based swaps, but rather the transactions in which they are involved.

She expanded on this perspective during her closing statements, emphasizing the broader context within which the SEC’s assessment was made.

Staren from the SEC stated, “These crypto assets by themselves are not investment contracts. LUNA alone is simply a piece of code.” Judge Rakoff announced that he would release a decision on the motion to dismiss by July 14, providing his ruling on the matter.

Also Read: SEC Designates 61 Cryptocurrencies as Securities in Binance Lawsuit

Important: This article is intended solely for informational purposes. It should not be considered or relied upon as legal, tax, investment, financial, or any other form of advice.

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