U.S. Judge Contemplates Whether Cryptocurrencies By Terraform Labs Are Securities

The US judge presiding over the lawsuit filed by the US Securities and Exchange Commission (SEC) against Do Kwon and Terraform Labs (TFL), the blockchain company he co-founded, is considering whether the digital currencies created by the South Korea-based crypto business should be classified as securities.

Kwon's legal team from Dentons law firm, which also represents Terraform Labs, has submitted additional documents in support of their earlier motion to dismiss the SEC's lawsuit.

During the recent court hearing, the focus was on determining whether the cryptocurrencies offered by TFL qualify as securities under an "investment contract."

U.S. District Judge Jed Rakoff in Manhattan raised questions about whether TFL's offering of the Anchor protocol, a savings, lending, and borrowing platform built on the Terra Blockchain that promises returns of up to 20% on investments in the algorithmic stablecoin TerraUSD (UST), should be regarded as a security.

The judge asked, "It is something you created, that only people who had taken this first step could take advantage of. I don't see why that's not a securities contract at that point."

In their motion to dismiss, Kwon and Terraform Labs argued that the SEC's charges should be dropped because the digital assets offered by their crypto business do not meet the criteria for securities, and therefore the U.S. financial regulator lacks jurisdiction or authority over them.

In response to the additional filings by Kwon's team, the SEC said that the "Defendants' supplemental arguments not only lack merit but leave no doubt that the Motion should be denied."

According to the financial regulator, "the major questions doctrine has no bearing on this case," the "defendants' reliance on the Binance transcript and the Coinbase mandamus petition are misplaced," and "the internal SEC emails have no bearing on this case."

SEC attorney Devon Staren remarked, "We're not doing anything new here," emphasizing that the SEC is simply applying existing securities laws.

Judge Rakoff announced that he will deliver his ruling on the motion to dismiss the case filed by Kwon and Terraform Labs' legal team on July 4.

Kwon is currently detained in Montenegro due to allegations of possessing and using forged travel documents.

While the Montenegrin High Court has approved Kwon's camp's bail proposal, it has ordered the crypto entrepreneur to remain in custody as the court reviews South Korea's extradition request to return him to his home country. The detention period could last up to six months.

Kwon is also involved in South Korea's political scene after admitting, in a letter to the prime minister and justice department, that he provided financial support to the political party Europe Now.