The United States Securities and Exchange Commission’s (SEC) lawsuit against Terraform Labs and its co-founder Do Kwon can be seen as the SEC’s “road map” for taking on other stablecoins, according to lawyers.
Gabriel Shapiro, general counsel at investment firm Delphi Labs, explained to his 33,800 Twitter followers on February 16 that the SEC’s arguments in its complaint against Kwon and Terraform were “more complete than usual.”
boy, there’s a lot to digest in the SEC lawsuit vs. Do Kwon and Terraform Labs
right off the bat, a very interesting fact is that the SEC is more thorough than usual–specifically running through the Howey test for various assets (UST, LUNA, and wLUNA) and also stating that… https://t.co /1JsBQijMnw pic.twitter.com/qHuL6mKpeo
— _gabrielShapir0 (@lex_node) February 16, 2023
Shapiro’s analysis follows the SEC’s February 16 lawsuit against Kwon and Terraform alleging they “orchestrated[ed] multi-billion dollar crypto asset securities fraud involving algorithmic stablecoins and other crypto asset securities.
Shapiro suggested the case could serve as a “road map” for how regulators might prosecute other stablecoin issuers in the future. He admitted that the SEC made the case that Terra’s algorithmic stablecoin, TerraClassicUSD (USTC), is a security:
“[The SEC] will state that the integration, promotion, marketing, commercial offers and others build the stablecoin ecosystem are ‘other people’s efforts’ which are ‘reasonably expected’ and can generate profits related to the stable.
He pointed out that the SEC applied the four prongs of the Howey Test to argue that USTC, Terra Luna Classic (LUNC) – renamed from Terra (LUNA) – and Wrapped LUNA (wLUNA) are all securities under US securities law.
The SEC also argued that Terraform Labs violated US securities laws by launching the Mirror Protocol, which allows users to create what Terraform calls an “mAsset,” a crypto version of an asset that “mirrors” the price behavior of other assets such as stocks. .
Regulators claim Terraform Labs conducted these securities-based swaps through the MIR token — which Shapiro believes is the “first” of all cryptocurrency-related lawsuits filed by the SEC.
Shapiro noted the SEC’s claim that wLUNA was a “receipt” for the security as a “first.”
Ryan Sean Adams, host of crypto-oriented podcast Bankless, made a similar argument to his 221,300 Twitter followers on February 16, noting that a legal victory against Terraform Labs would make it easier for other stablecoin issuers to follow suit.
Gensler’s next strategy is to go after Do Kwon and UST because he knows no one will defend him and if he wins, he will set a bigger precedent for controlling crypto.
It’s evil genius. https://t.co/FDLoeVcTLb
— RYAN SΞAN ADAMS – rsa.eth (@RyanSAdams) February 16, 2023
Terra-related tokens collapsed in May, 2022, which was partially triggered when the USTC lost its peg to the US dollar. Because LUNC was linked to USTC, it dropped in value by almost 100% and caused an even bigger decline in the crypto market, removing approximately $40 billion from the crypto market.
related: Why SEC wants to ban crypto staking and stablecoin under scrutiny – Watch Market Report live
Kwon admitted he was not “deported,” and is believed to be living in Serbia according to South Korean officials – who issued an arrest warrant.
Earlier in February, two South Korean prosecutors flew to the Balkan country to look for Kwon, but the search efforts were unsuccessful.
Cointelegraph contacted Terraform Labs for comment on the lawsuit but did not receive an immediate response.