A recent ruling by Southern District of New York District Judge Jed Rakoff in the SEC v. Terra lawsuit has triggered a lively debate among legal experts and crypto enthusiasts. Some critics contend that the Terra ruling directly opposes a previous decision concerning investment contracts and crypto assets.
However, Ji Kim, the General Counsel at the Crypto Council for Innovation, has taken to social media to dispel these notions, providing a comprehensive analysis that seeks to reconcile the decisions of Judges Rakoff and Torres.
Dissecting the Debate
According to Kim, there’s been a lot of talk about the decision in Terra, but upon close examination, he insists that there is no contradiction with Judge Torres’ ruling in Ripple.
1/ There’s been a lot of commentary regarding J. Rakoff’s opinion in Terra, but there is nothing in there that contradicts J. Torres’ ruling in Ripple that the investment contract is the security, NOT the underlying crypto asset.
— Ji Kim (@_jikim) August 1, 2023
He emphasizes that the key issue – identifying whether the investment contract or the underlying crypto asset is the security – has remained consistent between the two judgments. Ji Kim highlights that Judge Rakoff’s ruling actually aligns with the view that crypto assets themselves are not investment contracts.
To illustrate his point, the legal expert draws attention to Rakoff’s analogy that selling orange groves apart from a shared profit premise would not make them securities. Rakoff applies the same logic to crypto assets that were not tied to specific investment protocols or the Terraform blockchain ecosystem.
Stablecoins and Investment Contracts
Judge Rakoff also mentioned that a stablecoin designed exclusively to maintain a 1:1 peg with another asset would not reasonably be expected to generate profits as part of a common enterprise. This detail is crucial, as it helps clarify the boundaries of what can be considered an investment contract in the context of crypto assets.
Furthermore, Ji Kim takes time to outline what Judge Rakoff was and was not focusing on in his ruling. Rakoff’s attention was on instances where marketing could lead a buyer to believe their purchase would be pooled for a future investment return. He ends his analysis by emphasizing the variations in rulings depending on underlying facts and calls for Congress to bring clarity through legislation.
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