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A Crypto Exchange Faces the First Terra Crash Case

NY Times DealBook Newsletter (June 13, 2022)

A proposed class action filed in California federal court today appears to be the first U.S. case arising from the $40 billion Terra/Luna crypto crash last month, when the stablecoin known as UST, meant to maintain a $1 value, fell to about 11 cents. The case targets Binance.US, an exchange that promoted UST as “safe,” alleging that the company listed an unregistered securities offering and itself failed to register with the S.E.C.

Investors say they bought UST based on Binance’s claims.

The case, led by Kyle Roche of Roche Freedman and Tibor Nagy of Dontzin Nagy & Fleissig, argues that the company’s listing and promotions gave investors the impression that UST was a risk-free alternative to more volatile crypto investments and that Binance.US has been changing its arbitration clause since the crash, making the terms “unconscionable” in anticipation of an onslaught of complaints. A Binance.US spokeswoman countered that the assertions are meritless and that the company “adheres to all applicable regulations.” She added, “We will defend ourselves vigorously.”

Do the current rules apply to new products?

Gary Gensler, the S.E.C. chairman, argues that many crypto assets are classic “investment contracts” requiring registration with the agency and that crypto exchanges should register, too. Based on the Supreme Court’s 1946 “Howey Test,” an “investment contract” is defined as a monetary investment in a common enterprise with an expectation of profit from others’ efforts. But there is great debate in the crypto industry and among regulators and lawmakers about just what falls into that category.

Are algorithmic stablecoins securities? 

UST’s dollar price was stabilized through a relationship with another cryptocurrency, Luna, and relied on arbitrage incentives. Investors maintain UST by making or destroying its supply in exchange for Luna and can profit in the process. But in May, when investors fled UST, Terra founders had to intervene. The arbitrage design and that interference, among other things, show that UST is an investment contract per the Howey Test, the complaint contends.

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