The SEC has already sued Terraform Labs. It has every reason to investigate UST, lawyers say

Quick Take

  • The actual regulatory regime for stablecoins is still very much under development.
  • But that may not matter in the case of TerraUSD, former SEC counsel say.
  • An existing SEC investigation into Terraform Labs and the Terra protocol’s interaction with synthetic securities changes the basis of the SEC’s involvement. 

The Securities and Exchange Commission is likely already investigating what happened to UST over the past week, two former SEC lawyers tell The Block. 

“The SEC is already on the scene as they are investigating the Mirror protocol,” said Philip Moustakis, who left the SEC’s enforcement division for law firm Seward & Kissel in 2019, in conversation with The Block.

A spokesperson for the SEC told The Block: “The SEC does not comment on the existence or nonexistence of a possible investigation.” The regulator also declined to comment on TerraUSD

The status of stablecoins in the US regulatory framework is the subject of a great deal of debate. Kwon himself wrote on Twitter on April 21:

But it gets more complicated, according to Moustakis.

“Even if there’s a question as to whether UST is a security,” Moustakis continued, “Even if the stablecoin as designed may have eluded the application of the federal securities laws, the subsequent transactions could drive it back into the purview of the SEC.” 

Moreover, a stablecoin that loses its stability may well lose its claims not to be based on an expectation of a third party acting to create profit for investors. Which is to say, changing facts and circumstances surrounding an asset can change whether the SEC approaches it as a security. 

This draws attention to the associated Anchor protocol’s promise of 20% returns on staked UST, as well as the Luna Foundation Guard’s frenetic efforts to inject new capital to preserve the peg. 

Beyond questions of whether stablecoins are securities is the question of the SEC’s international sway.

Though members of the crypto world have denied that Do Kwon, a South Korean national, will face repercussions from the US regulator, the commission subpoenaed him personally over the activities of Terraform Labs and Mirror, a protocol for synthetic assets. It’s difficult but not impossible for the US regulator to cross borders.  

That SEC famously served Kwon papers in September 2021 at the Messari Mainnet Conference in New York before he was to speak on-stage. Kwon subsequently disputed the SEC’s right to regulate him — a case he lost in a Manhattan court in February, giving the SEC the right to continue its investigation into Terraform Labs. 

At the time, Kwon denied being served at all, a fact CoinDesk asked him about in December. In a moment from that conversation that went viral, Kwon said: “It’s fascinating when talking to Americans that they’re sort of obsessed with American policy and American regulators and things like that. It’s quite possible that in other parts of the world they have other priorities and other things to pay attention to.”

Despite this disinterest in American policy and American regulators, TerraUSD was pegged to the US dollar. Mirror Protocol allowed trading of synthesized or "mirrored" versions of US stocks like Tesla and Apple in exchange for the Terra blockchain-based UST. 

In December, Kwon’s lawyers argued that “the court lacks jurisdiction over Mr. Kwon because he is not a United States resident and has no case-related contacts with the U.S.” That argument failed to hold up. 

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