In February of this year, the SEC filed a lawsuit against Terraform Labs and its CEO, Do Kwon, accusing them of orchestrating a multi-billion dollar cryptocurrency securities fraud scheme. They allegedly illegally raised billions of dollars from investors by offering and selling a series of interconnected cryptocurrency securities, many of which were conducted in unregistered transactions. These include the governance token of the Mirror protocol, the algorithmic stablecoin Terra USD (UST), and the reserve and governance tokens of the Terra ecosystem called LUNA. Additionally, the synthetic assets called mAssets, which are designed to track the prices of US company stocks, were deemed by the SEC as “securities-based exchange transactions” in violation of securities laws.
Surprisingly, Judge Jed Rakoff of the US Southern District Court in New York concluded that UST, LUNA, wLUNA, and MIR tokens fall within the category of “investment contracts” and are unquestionably securities. However, he unexpectedly ruled that mAssets themselves are not securities and do not fit the legal definition of “securities-based exchange transactions.”
The court believes that mAssets, due to their generation requiring over-collateralization, do not involve the transfer of financial risk in their mechanism. Furthermore, users cannot profit from holding mAssets because the value of their collateral must always exceed the value of the underlying reference securities.
However, even individuals in the cryptocurrency field were surprised by this judgment. Not all mAssets holders acquire them through over-collateralization; some acquire them through buying and selling, thereby gaining exposure to the underlying assets (securities) and profiting from holding and selling at higher prices. The judge’s definition of mAssets goes beyond the expectations of many.
Regarding other allegations of fraud, the judge believes that there is a factual dispute, and therefore, these disputes will be decided by a jury. The jury trial is expected to begin on January 24, 2024.
