In a strong ruling, a US federal judge backs the Securities and Exchange Commission (SEC) in a crucial case against Terraform Labs and its CEO Do Kwon. The determination establishes that two of the company's cryptocurrencies, Luna and Mir, were traded as unregistered securities, which was illegal.

Judicial Ruling and Projection of the Case

Judge Jed Rakoff, in a summary judgment last Thursday, ruled in favor of the SEC, holding that Terraform is responsible for the sale of unregistered securities. This decision sets the stage for a civil fraud trial that is scheduled to begin on January 29 in federal court in Manhattan.

Terraform Labs Ecosystem Context

Terraform attracted the attention of regulators when its stablecoin system crashed in May 2022, triggering what became known as the "crypto winter." The company offered two cryptocurrencies linked to each other: TerraUSD ( #UST ) and #luna .

Decoupling and Consequences

UST, a stablecoin tied to the US dollar, lost its value, which affected Luna being connected to this currency. This decoupling triggered a crisis in the cryptocurrency market.

Why are Luna and Mir now considered securities?

The famous "Howey test", a legal criterion established by the Supreme Court in 1946, is key to this consideration. It defines an "investment contract" based on the investment of money, profits from the efforts of others, and the intention to participate in a common enterprise.

Kwon stated that Luna holders just had to wait and see profits, which resembles the concept of an "investment contract." In the case of Mir, investors received a percentage of trading commissions and the company actively sought to improve the Mirror protocol, evidencing a "common enterprise."

Ramifications and Challenges for Terraform

This ruling not only puts Terraform under the legal microscope for fraud, but also raises the possibility of reclassifying other cryptocurrencies in its ecosystem. For affected investors, hope of recovering some of their losses could be revived in court.