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Federal Judge Rules Certain Cryptos Qualify as Securities

A federal judge presiding in Manhattan has expressed the view that cryptocurrencies should be regarded as securities, regardless of the method of their transaction. This interpretation grants the Securities and Exchange Commission (SEC) authority to press charges related to securities against Terraform Labs. This legal stance also extends to the founder of the company, Do Kwon, and carries significant implications for the landscape of cryptocurrency legislation and legal actions.

The decision delivered by Judge Jed Rakoff introduces complications to the ongoing legal battles between the SEC and both Ripple and Coinbase. The SEC had put forth allegations asserting that Coinbase had engaged in the sale and offering of securities without proper registration. Coinbase has vehemently refuted these claims, maintaining that it has not listed any crypto assets as securities.

Interestingly, this perspective diverges from a previous ruling within the same district court that determined Ripple, another prominent cryptocurrency, might not universally qualify as a security.

The industry viewed the Ripple ruling as a favorable outcome, as it highlighted the nuanced nature of whether a cryptocurrency can be categorized as a security, contingent on the buyer’s identity. The SEC has contended in various cases against major exchanges, such as Coinbase, Binance and Kraken, that multiple cryptocurrencies listed on these platforms should be considered securities.

Rakoff commented on the earlier Ripple case ruling, stating, “The court refrains from distinguishing between these coins based on their vending process. Consequently, coins directly vended to institutional investors will be regarded as securities, in contrast to those distributed through secondary market transactions to retail investors.” Rakoff’s statement also rejects the approach taken by a fellow judge within the same district.

Terraform Labs and Do Kwon are facing allegations of orchestrating a substantial fraudulent scheme against investors involving the unauthorized sale of multiple crypto assets, including TerraUSD and Luna.

Rakoff’s stance also lends credence to the arguments put forth by certain legislators, who assert the necessity of cryptocurrency legislation to provide clarity regarding the roles of regulatory bodies and the judiciary in overseeing crypto markets.

The SEC’s pursuit of numerous other cryptocurrency companies for their alleged unregistered sale and offering of securities has further underscored the regulatory uncertainty surrounding the cryptocurrency landscape. This uncertainty has been reflected in the performance of Coinbase shares and the valuation of individual cryptocurrencies. Notably, the value of several cryptocurrencies saw an upswing following an earlier ruling, only to decrease after Rakoff’s contrasting decision.

Crypto industry players such as Canaan Inc. (NASDAQ: CAN) now have no choice but to watch as these different legal battles shape up or until Congress acts and passes definitive regulations which clarify what is or isn’t a security.

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