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.