SEC’s Stablecoin Hammer, Courtesy Terraform Labs and Do Kwon

The US Securities and Exchange Commission sued Terraform Labs and Do Kwon last week, alleging that the terraUSD stablecoin was a security, along with various other tokens and products. This feels quite important.

You’re reading State of Crypto, a CoinDesk newsletter that looks at the intersection of cryptocurrency and government. click here to sign up for future issues.

Last week I wrote about the SEC potentially calling a stablecoin a value. The SEC hasn’t actually alleged that in a lawsuit yet – it’s just said they believe Binance USD is a security in a Wells Notice to Paxos. In suing Terraform, the SEC is actually claiming that terraUSD (UST) is a security, along with pretty much every other token issued by Terraform Labs.

The SEC sparked fury in the crypto community in September 2021 by subpoena a then unnamed person while at Messari’s Mainnet Conference. Although he initially denied receiving the subpoena, Do Kwon later admitted that he had been the one who received the subpoena when he sued the SEC alleging violations of the Administrative Procedures Act and due process (the case was voluntarily dismissed last year). The SEC’s interest seemed to be in the Mirror Protocol (which had MIR tokens on top of it), which helped create mirror assets (mAssets), basically tokens linked to the price of stocks.

The SEC’s investigation seemed to die down for a while. And of course, Terraform itself had a pretty miserable 2022.

Last Thursday, the SEC sued Terraform and Kwon, whose current whereabouts are a mystery.

According to the filing, the SEC alleges that the defendants sold unregistered “crypto asset securities” and securities-based swaps (the aforementioned mAssets). A lot of fraud is also alleged. The biggest problem may be the claim that UST’s price was not stabilized at all by the LUNA mechanism; rather, the price was artificially maintained with the help of an undisclosed firm (apparently Jump Trading) that bought a large amount of UST in exchange for discounted LUNA.

Another very interesting aspect of the filing is how thorough the SEC was in explaining its reasoning. The SEC alleged that LUNA, wrapped LUNA, UST, MIR, and mAssets were all securities, and provided a detailed Howey analysis for the first four types of tokens and explained how the last one was a security-based swap.

So we have the SEC alleging that a (specific) stablecoin is a security, that an ecosystem token associated with the stablecoin is a security, that these other tokens are also securities, and doing so with defendants that the industry will be hard pressed to defend (you know, the cause of all the alleged fraud and the whole collapse last year).

If the SEC wins this case, it will get a court ruling confirming its oversight of a certain type of stablecoin and related ecosystem tokens. And while it’s true that decisions generally aren’t necessarily seen as legal precedent unless an appeals court affirms them, we’re seeing district court decisions cited as precedent in all sorts of crypto-related cases right now.

Over in Brussels, the crypto scene is abuzz with the visit of a delegation from the US Congress hoping to learn the nuts and bolts of crypto regulation.

The trip makes a lot of sense — and not just because lawmakers’ recess dates from both Washington, DC and Brussels happened to line up this week.

The EU is currently finalizing its Markets in Crypto Assets (MiCA) and Transfer of Funds Regulations, which set out disclosure rules for crypto issuers, reserve requirements for stablecoins and customer identification rules to tackle money laundering.

Senior officials in Brussels are quite proud of being the first major jurisdiction to regulate the sector, but they worry there is no point unless other places follow suit. US lawmakers, meanwhile, may feel they can learn something from Europe’s experience with difficult issues like how to regulate coins that don’t have a single centralized issuer, or cryptoassets whose characteristics or purposes change over time.

The US delegation appears to be a who’s who of DC-based crypto policy experts. A list seen by CoinDesk includes over a dozen bipartisan staffers for the banking and agriculture committees in both the Senate and House, plus staffers for lawmakers including Sens. Cynthia Lummis (R-Wyo.), Ron Wyden (D-Ore.) and Kyrsten Sinema (I) -Ariz.) – all involved in recent high-profile legislation for the sector.

Sources briefed on the visit told CoinDesk they are meeting Brussels-based officials from the European Commission and European Parliament, as well as industry body Blockchain for Europe. That will be followed by a detour to nearby Paris, where they will speak to officials from the EBA and ESMA, the EU banking and securities markets agencies that now need to set out some of MiCA’s finer details.

An EU official, who asked not to be named to speak candidly, told CoinDesk that they “hope to inform our colleagues in [the] The US Congress on how the EU operates, what motivated us to propose MiCA, and what the substantive requirements and political choices made in the MiCA negotiations are”, which requires greater coordination of an international ecosystem.

Industry representatives, too, hope that Washington will at least partially copy Brussels’ example, putting in place a sensible and discerning crypto framework, rather than relying on sporadic and sometimes unpredictable enforcement disruptions like the Securities and Exchange Commission’s recent crackdown on Kraken.

“I hope they’re taking notes,” Ava Labs general counsel Lee Schneider told CoinDesk. “I wish there was more regulation, rather than enforcement actions.”

If you have thoughts or questions about what I should discuss next week or any other feedback you’d like to share, feel free to email me at [email protected] or find me on Twitter @nikhileshde.

You can also join the group conversation at Telegram.