The question of what exactly an "investment contract" is and whether that phrase applies to TerraUSD (UST) became the heart of the Thursday night hearing on Terraform Labs' motion to dismiss a lawsuit brought by the U.S. Securities and Exchange Commission.
"The SEC only wants one word to have any meaning. They want to delete the word 'contract,'" argued Douglas Henkin, an attorney with the Dentons law firm representing Terraform.
Part of the defense's core argument pushed the idea that UST did not have a contract and was designed for practical uses, rather than as an investment – echoing similar arguments numerous other token issuers have made in arguing that their respective crypto assets are not securities.
Ahead of Thursday's hearing, which was originally scheduled for 2:00 p.m. ET but later moved to 7:00 p.m. ET, Terraform's legal team filed some additional documents, including a transcript from the hearing held Tuesday to discuss the SEC's motion for a temporary restraining order against Binance.US.
Even though some people may have staked UST in the Anchor protocol in the hopes of a return, the token itself should not be considered a security because of the possible other uses, the defense argued.
"By design ... it's pegged one to one to the dollar, it's designed not to fluctuate," Henkin said. "That's for commerce ... that's a consumptive use."
The analysis of whether something is an investment contract allows for possible consumptive uses, said SEC Devon Staren.
The expectations by investors and the economic realities around the UST token are what led to the SEC's assertion that there were securities violations, she said.
"We don't agree that there needs to be a formal contract," she said.
The SEC sued Terraform Labs earlier this year, alleging it and founder Do Kwon mislead investors in the TerraUSD project, and alleging that Terraform's Anchor Protocol and LUNA token were securities.
In April, Terraform moved to dismiss the charges, claiming that the SEC hasn't asserted jurisdiction over either the company or Kwon and making disputes tied to the Administrative Procedures Act and the major questions doctrine.
Senior Judge Jed Rakoff, of the U.S. District Court for the Southern District of New York, questioned whether there was a major questions issue, saying Congress intended to give the SEC broad regulatory authority when drafting the laws overseeing the agency.
Henkin likened UST to bitcoin, saying that unlike other assets which are managed by a centralized party, UST is controlled by a decentralized group through the LUNA token.
"It's true that the original algorithm was coded by TFL, but then it was turned over to the community," Henkin said.
Henkin and the judge went back and forth on various orange grove comparisons, using the Supreme Court case at the heart of the Howey Test to look for hypothetical similarities to UST and how it is currently or may be used.
The Terraform attorney also pointed at multiple points to the Supreme Court's recent West Virginia vs. Environmental Protection Agency decision, which said Congress must authorize any major actions from the EPA (and other federal agencies) if they're far afield from what's seen as the agency's traditional remit.
But Staren said the decision only "prevents agencies from promulgating extraordinary new rules," saying the SEC is only enforcing existing law.
Near the end of the hearing, the SEC emphasized that it's not necessarily the tokens themselves, but the broader ecosystems they're part of that supported its analysis.
Referring to Mirror Protocol assets, the SEC's Staren said that the regulator isn't alleging the assets themselves are securities-based swaps, but the transactions they're involved in are. She broadened that sentiment during her closing remarks.
"These crypto assets alone are not investment contracts," Staren said. "LUNA alone is just a piece of code."
Judge Rakoff said he would publish a ruling on the motion to dismiss on or before July 14.
Elizabeth Napolitano contributed reporting.
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