The Battle Over Stable Currencies: Paradigm Challenges the SEC’s jurisdiction over Terra’s UST

On April 25th, Rodrigo, the legal director of Paradigm, said on Twitter: “Paradigm submitted a amicus curiae briefing in the US SEC’s lawsuit against Terra and Do Kwon. Paradigm is not an investor in Terra, and the briefing we submitted does not support any party’s motion. Our only interest is to counter the SEC’s attempt to continue to expand its jurisdiction over cryptocurrencies.” Rodrigo mentioned: Through enforcement actions against Terra, the SEC attempts to advance an infinite theory that includes stable currency within its jurisdiction, that is, if any instrument can be traded as a so-called “crypto asset security,” then the instrument itself will become a “crypto asset security. Our briefing focuses on responding to the SEC’s new theory that algorithmic stable currency UST is a security. The SEC’s theory of UST is a supplement to the core claims in litigation. Nevertheless, we believe it is crucial that Judge Rakoff, who is responsible for this case, avoid unintentionally supporting this unsupported theory, and that the US Securities and Exchange Commission can seek to widely apply it to other stable currencies

Paradigm: In order to avoid SEC defining stable currency as securities, amicus curiae briefing has been submitted in Terra case

In recent years, cryptocurrencies have been attracting increasing regulatory attention in the United States. The Securities and Exchange Commission (SEC) has been working to establish whether various digital assets fall under its jurisdiction as securities. In April 2021, Paradigm, a leading cryptocurrency investment firm, stepped up to challenge the SEC’s jurisdiction over algorithmic stable currency UST. In this article, we will explore the details of the lawsuit and what it means for the world of cryptocurrencies.

Understanding the SEC’s Claims Against Terra and Do Kwon

On March 29th, 2021, the SEC filed a lawsuit against Terra and its co-founder, Do Kwon, alleging that they had raised $25 million through an unregistered initial coin offering (ICO) of the UST stablecoin. According to the SEC, UST functions as a security because it meets the definition of an investment contract. Specifically, the SEC argues that UST is an investment contract because it is “a digital asset that was offered and sold as an investment, with an expectation of profits, and that derives its value from the efforts of others.”
Terra and Do Kwon vigorously dispute the SEC’s allegations, pointing out that UST is designed to be a stable currency that maintains a peg of 1:1 with the US dollar. They argue that UST does not meet the definition of an investment contract and therefore falls outside the SEC’s jurisdiction over securities.

Paradigm Challenges the SEC’s Jurisdiction Over UST

On April 25th, 2021, the legal director of Paradigm, Rodrigo, tweeted that the firm had submitted an amicus curiae briefing in the SEC’s lawsuit against Terra and Do Kwon. In the brief, Paradigm argues that UST is not a security under the Howey Test, which is the legal standard the SEC uses to determine whether an instrument is an investment contract. According to Paradigm, UST does not satisfy the “expectation of profits” prong of the Howey Test because it is designed to be a stable currency with a fixed exchange rate.
Furthermore, Paradigm argues that the SEC’s interpretation of UST as a security would set a dangerous precedent for other stable currencies. If UST is considered a security, other stable currencies that share similar characteristics could also be classified as securities, leading to a significant chilling effect on the development of crypto assets.

The Significance of Paradigm’s Briefing

Paradigm’s amicus brief is an important development in the cryptocurrency industry’s ongoing legal battles. By challenging the SEC’s jurisdiction over UST, Paradigm is setting a precedent for other companies to stand up to the SEC’s regulatory overreach.
Moreover, Paradigm’s intervention in the case demonstrates the increasing role that cryptocurrency investment firms are playing in shaping the legal landscape for digital assets. As more investment firms enter the industry, they are seeking to protect their investments by advocating for more favorable regulatory environments.

Conclusion

The SEC’s lawsuit against Terra and Do Kwon highlights the ongoing regulatory uncertainty facing the cryptocurrency industry. With Paradigm’s amicus brief, the industry is beginning to fight back against what many view as the SEC’s overreach. As the lawsuit unfolds, it will be interesting to see how Judge Rakoff responds to Paradigm’s arguments and how the industry as a whole continues to challenge the SEC’s regulatory authority.

FAQs

1. What is an amicus curiae briefing?
An amicus curiae brief is a legal document filed by a third party who is not involved in a case but has an interest in its outcome. The brief is intended to provide the court with additional information or perspectives that may not have been considered by the parties directly involved in the case.
2. What is the Howey Test?
The Howey Test is a legal standard developed by the US Supreme Court to determine whether an instrument constitutes an investment contract. The test has four prongs, including an expectation of profits, derived from efforts of others, and an investment in a common enterprise.
3. Will the SEC’s jurisdiction over cryptocurrencies change?
The SEC’s jurisdiction over cryptocurrencies is evolving as regulatory authorities grapple with the unique characteristics of digital assets. The outcome of the Terra and Do Kwon case, and Paradigm’s intervention, may help to shape the future of cryptocurrency regulation in the United States.