In a recent ruling by US District Judge Jed Rakoff, the US Securities and Exchange Commission (SEC) emerged victorious in the Terraform Labs case, causing concern and unease within the cryptocurrency community over the classification of stablecoins.This has led legal experts to question the ruling and its implications.
The case centered around Do Kwon, a cryptocurrency entrepreneur, and his company Terraform Labs, who were found to have violated US law by failing to register two digital currencies that eventually collapsed in 2022. The TerraUSD stablecoin and Luna (LUNC) were at the heart of the SEC’s allegations.
Doubts On Stablecoin’s Security Status
Pro-XRP lawyer Jeremy Hogan took to social media, expressing skepticism over the classification of stablecoins as securities.
Jeremy Hogan’s skepticism regarding the classification of stablecoins as securities stems from his questioning of how a stablecoin, which is typically pegged to a specific value such as the US dollar, can be considered a security.
The lawyer raises the point that stablecoins are designed to maintain a stable value and serve as a digital representation of a traditional currency, which may not exhibit the characteristics typically associated with securities.
Hogan pointed to Judge Rakoff’s ruling, which stated that a stablecoin qualifies as a security when it can be staked for a return on investment, irrespective of whether investors stake it or not. Pro-XRP lawyer Hogan stated:
How can a stablecoin be a security? How can you buy something “pegged” to a dollar and expect profit from it? Per Judge Rakoff in the SEC v. Terraform Labs case, a stablecoin is a security when you can stake it for a return on investment. Regardless of whether you do, or not.
Hogan also brings up Judge Rakoff’s age and raises the point that older individuals in positions of power, such as the presidency, should possess an understanding of new technologies, including cryptocurrencies. Hogan implies that comprehending new technologies is crucial for making informed decisions and shaping appropriate policies.
Ripple Case Contrasted With Terraform Labs Ruling
Ripple’s Chief Legal Officer Stuart Alderoty, also weighed in on the ruling, expressing no firm stance on the Terraform case but offering thoughts on the decision.
Alderoty emphasized the importance of factual considerations and noted that Judge Rakoff did not criticize or refer to Judge Torres’ ruling in the Ripple case. However, Alderoty criticized the SEC’s approach of engaging in lengthy litigation on a token-by-token basis, viewing it as a misguided pursuit of political power rather than sound policy.
Journalist Eleanor Terret, reporting on the ongoing legal battle between Ripple and the SEC, highlighted a key difference between the Terraform Labs case and the Ripple case.
Terret emphasized that Judge Rakoff was able to establish the existence of an “investment contract” between Terraform Labs and retail investors based on the Howey Test, citing Kwon’s statements that led investors to believe they could profit from Terraform’s blockchain development efforts.
In contrast, Judge Torres was unable to establish the existence of a similar contract between Ripple and non-institutional purchasers of XRP.
These recent developments have ignited a broader discussion about the classification of stablecoins as securities, the potential impact on the crypto space, and the SEC’s approach to regulating the industry.
As legal experts and industry stakeholders voice their concerns, the outcome of these debates could shape future regulations and policies surrounding cryptocurrencies and their respective legal classifications.
Featured image from Shutterstock, chart from TradingView.com
