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U.S. Judge Denies Terraform Labs’ Motion to Dismiss SEC Lawsuit, Citing Ripple Precedent

On July 31, a U.S. judge overseeing the case denied Terraform Labs’ motion to dismiss a lawsuit filed by the United States Securities and Exchange Commission (SEC). The lawsuit, filed on February 16, accuses Terraform Labs and its founder, Do Kwon, of orchestrating a multi-billion dollar crypto asset securities fraud.

The judge’s decision also rejected a July 13 ruling by U.S. District Judge Analisa Torres, who had previously ruled that Ripple did not violate securities laws by selling its XRP token on public exchanges at $0.69. This ruling sets the stage for the SEC’s lawsuit against Terraform Labs to proceed.

Terraform Labs’ legal representatives had filed a motion for the dismissal of the suit in April, backed by supplemental materials in June. The company argued that the SEC lacked jurisdiction over both the company and its founder, and disputed the agency’s position that tokens like Mirror Protocol (MIR), Terra Classic (LUNC), and TerraUSD Classic (USTC) should be considered securities.

The defendants also contended that Congress should decide on the regulation of cryptocurrencies and asked the SEC to wait for legislative action. However, Judge Jed Rakoff of the Southern District Court of New York rejected this argument, stating that the SEC had the authority to regulate crypto tokens without specific Congressional authorization.

The judge further analyzed the Howey test, which is used to determine whether an asset is a security. He noted that no formal contract is necessary to meet the test, and tokens themselves can be considered as evidence before the court.

Additionally, the court declined to draw a distinction between the tokens MIR and LUNA based on their manner of sale, contrary to a recent case involving SEC v. Ripple Labs Inc. The rejected approach in that case was that XRP was considered a commodity when sold on the secondary market.

The SEC’s victory in the rejection of Ripple’s distinction between primary and secondary purchasers could set a precedent that may work in favor of the SEC in similar cases moving forward.

The denial of Terraform Labs’ motion to dismiss marks a significant development in the legal proceedings against the company. The case now proceeds, and the outcome could have far-reaching implications for the regulatory landscape surrounding crypto assets in the United States. As the lawsuit progresses, it will undoubtedly attract the attention of investors and industry players, who are closely watching how the court’s decision may shape the future of cryptocurrency regulation in the country.


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