Diverging Crypto Verdicts: Terra Judge Contradicts XRP Ruling on Securities Debate

A federal judge in Manhattan diverged from a previous court decision, ruling that certain cryptocurrency assets, including Terraform Labs’ TerraUSD stablecoin, could be classified as securities. This comes after a contrasting verdict earlier this month that classified Ripple Labs’ token as a non-security when sold on secondary markets.

Judge Jed Rakoff’s refusal to apply the reasoning from the recent Ripple Labs court decision to the Terraform case is pivotal. The earlier verdict asserted that Ripple’s XRP token sales did not breach securities laws due to the fact that purchases were made on secondary markets. Judge Rakoff rejected this ‘distinction between purchasers’, stating it did not comply with the legal Howey test that governs whether crypto assets are securities.

XRP Ruling Subject to Appeal

The SEC, in light of a mixed win for Ripple in its lawsuit, suggested late Friday that the Ripple decision could face appeal. The agency filed new documents in its lawsuit against Terraform Labs, citing the Ripple ruling as flawed.

Judge Rakoff’s judgment marks a considerable triumph for the SEC as it escalates enforcement actions against crypto firms accused of unlawful token sales. His verdict implicates TerraUSD as a potential security that should have been registered, especially given its collapse last year, which resulted in a $40 billion loss of value.

Judge Rakoff dismissed Terraform’s argument that the SEC lacked authority to regulate stablecoins without explicit Congressional authorization. He ruled that cryptocurrency is significant enough to warrant the application of the “Major Questions Doctrine”. However, the judge stated that the doctrine does not apply to crypto asset markets as they are not a ‘portion of the American economy’ bearing ‘vast economic and political significance’ like energy or tobacco industries.

Regarding fraud charges, Rakoff found the SEC to have presented adequate evidence to suggest that Terraform and Kwon had motive to mislead investors about the utility of their crypto-assets.

XRP’s Ripple Effect

The SEC, not missing a beat, promptly declared the Ripple XRP case was ‘wrongly decided’ and hinted at an appeal. New documents filed late Friday in the Terraform Labs case by the SEC indicate that the agency may be gearing up to challenge the previous Ripple rulings.

The 50-page opinion from Judge Rakoff serves as a massive win for the SEC in their intensified enforcement actions against crypto companies alleged of illegal token sales.

Crypto Sector Under Close Watch

Amidst rising global concerns about the unregulated nature of cryptocurrency, Rakoff’s ruling has broad implications for the crypto industry at large. Crypto lending platforms and other intermediaries have been put on notice, emphasizing the necessity to comply with securities laws, as stated by SEC Chair Gary Gensler.

As the lawsuit moves forward to the discovery phase, the SEC is seeking to recover ill-gotten investor funds in addition to civil penalties. The broader impact on the crypto community and the market at large remains to be seen, as the world watches the unfolding drama between regulators and the burgeoning world of digital assets.