“Surprising Verdict: UST and LUNA Classified as Securities by Judge, but ‘mAssets’ Ruling Leaves Everyone Stunned”

"Surprising Verdict: UST and LUNA Classified as Securities by Judge, but 'mAssets' Ruling Leaves Everyone Stunned"

"Surprising Verdict: UST and LUNA Classified as Securities by Judge, but 'mAssets' Ruling Leaves Everyone Stunned"

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 by illegally raising billions of dollars from investors through the offering and sale of a series of interconnected cryptocurrency securities. Many of these transactions took place in unregistered exchanges, including the governance token of the Mirror protocol, the algorithmic stablecoin Terra USD (UST), and the reserve and governance token of the Terra ecosystem, LUNA. In addition, the synthetic assets mAssets, which are designed to track the prices of U.S. company stocks, were also deemed by the SEC to be “securities-based exchange transactions” and in violation of securities laws.

Surprisingly, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York concluded in this case that UST, LUNA, wLUNA, and MIR tokens fall within the category of “investment contracts” and unquestionably qualify as securities. However, to the surprise of many, Judge Rakoff ruled that the synthetic assets mAssets themselves are not securities and do not meet the legal definition of “securities-based exchange transactions”.

The court determined that the generation of mAssets requires over-collateralization and does not involve the transfer of financial risk, and users cannot profit from holding mAssets as the value of the collateral must always exceed the value of the underlying reference securities.

However, even cryptocurrency experts were surprised by this ruling. Not all mAssets holders acquire mAssets through over-collateralization; some obtain them through buying and selling, thereby gaining exposure to the underlying assets (securities) and making a profit by holding and selling at a higher price. The judge’s definition of mAssets went beyond the expectations of many.

As for other allegations of fraud, the judge found that there is a factual dispute, and therefore, these disputes will be decided by a jury. The jury trial is scheduled to begin on January 24, 2024.