Ripple ruling precedent rejected in denial of Terraform Labs’ motion to dismiss SEC lawsuit.

Ripple ruling precedent rejected in denial of Terraform Labs' motion to dismiss SEC lawsuit.

The Growing Legal Scrutiny of the Blockchain Industry

A recent ruling by a federal judge has highlighted the increasing legal scrutiny faced by companies in the blockchain industry. In this case, Terraform Labs, the issuer of stablecoin TerraUSD (UST), had its motion to dismiss a lawsuit from the U.S. Securities and Exchange Commission (SEC) denied. The judge stated that the SEC had adequately argued its jurisdiction and made a plausible claim that TerraUSD, along with the Anchor Protocol and LUNA tokens, may have violated securities laws.

This ruling comes at an interesting time, as another judge had recently ruled differently in a similar case involving Ripple Labs and the sale of XRP. In that case, Judge Analisa Torres ruled that Ripple did not violate securities laws when making XRP available for retail investors to purchase on secondary platforms. However, Judge Jed Rakoff, who presided over the Terraform Labs case, rejected this ruling and emphasized the importance of the Howey Test, a landmark Supreme Court case that defines whether a transaction qualifies as an investment contract.

The SEC’s lawsuit against Terraform and its founder Do Kwon centers around allegations of misleading investors about UST and fraud. Terraform’s argument for dismissal was that people bought UST for practical purposes and did not have a reasonable expectation of profit. They also cited the recent Ripple ruling as a precedent, claiming that retail investors could not have known they were purchasing XRP directly from Ripple.

However, Judge Rakoff disagreed with this line of reasoning, stating that the distinction between purchasing directly from the defendants or through intermediary exchanges is irrelevant in determining whether a reasonable person would view the defendants’ actions as a promise of profits. This ruling suggests that courts may take a more holistic approach to assessing securities violations in the blockchain industry.

In addition to denying Terraform Labs’ motion to dismiss, Judge Rakoff also rejected their objection regarding the “major questions doctrine.” This doctrine, stemming from a Supreme Court ruling, prevents regulatory agencies from exceeding their mandate. It has been invoked by several crypto defendants, including Coinbase, in their defense against the SEC. By rejecting this objection, Judge Rakoff has signaled that regulators may have more latitude in bringing enforcement actions against blockchain companies.

The SEC has already indicated that it may appeal this ruling, indicating the significance of the case for the blockchain industry as a whole. Regardless of the final outcome, this ruling sheds light on the evolving legal landscape surrounding cryptocurrencies and blockchain technology.

The impact of this ruling has also been felt in the market. Following the publication of the ruling, the price of XRP, which is closely associated with Ripple, fell by around 2%. This response underscores the market’s sensitivity to legal developments in the blockchain industry.

In conclusion, the recent ruling by Judge Jed Rakoff denying Terraform Labs’ motion to dismiss the SEC lawsuit highlights the growing legal scrutiny faced by companies in the blockchain industry. This ruling, coupled with the rejection of the “major questions doctrine,” signifies a shift in how courts and regulators perceive securities violations in the blockchain space. As the industry continues to mature, it is crucial for companies and investors to navigate these legal complexities to ensure compliance with securities laws and maintain market stability.

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