Former CFTC Chairman: SEC Was 'Absolutely Right' to Sue Terraform Labs, Do Kwon

The U.S. Securities and Exchange Commission (SEC) is right to go after stablecoin issuer Terraform Labs and founder Do Kwon, said Timothy Massad, former chairman of the Commodity Futures Trading Commission (CFTC).

“They [the SEC] were absolutely right to make these charges,” Massad, now a research fellow at Harvard University’s Kennedy School of Government, said on CoinDesk TV’s “First Mover” on Friday.

“When you solicit people to invest in a token promising them a 19% to 20% return, that’s a security,” said Massad.

This week, the SEC filed a complaint against the Singapore-based crypto company and Kwon, claiming they mislead investors about the terraUSD (UST) algorithmic stablecoin. According to the complaint, Terra and Kwon engaged in fraud, the sale of unregistered securities and the sale of unregistered security-based swaps. The Terra ecosystem collapsed in mid-2022, with reverberations subsequently felt throughout the crypto industry. Kwon is being sought by Interpol.

The SEC’s complaint further alleges Terra misled investors by misrepresenting the health and stability of UST, which was supposed to be pegged to the U.S. dollar. Terra's LUNA token played an important role in maintaining the price of the UST stablecoin.

“UST’s price falling below its $1 peg and not quickly being restored by the algorithm would spell doom for the entire Terraform ecosystem, given that UST and LUNA had no reserve of assets or any other backing,” the filing stated.

“When you market LUNA as something that can be obtained by exchanging [UST] and that the value of LUNA will also increase depending on the various actions that are taken … that's also a security,” Massad said.

Read more: SEC Sues Terraform Labs, Do Kwon for Misleading Investors on TerraUSD Stablecoin

Massad, who believes the SEC and CFTC can work together on regulating crypto by using a self-regulatory organization (SRO), said he thinks there are areas of the industry that need clarity and a comprehensive framework. However, it may come down to reading between the lines.

“The industry often complains about lack of regulatory clarity, but you just need to have good lawyers who can read the law and say, ‘Yeah, that’s probably a security,’” he said.

No need to wait on stablecoin regulation

Massad said investors don't have to wait for Congress to act on regulating stablecoins.

“While legislation would be great, we don't need to wait for legislation,” Massad said, noting he co-authored a white paper on that very topic in August that was published by the Brookings Institution's Hutchins Center.

“Bank regulators have the ability today to create a framework that could license stablecoin issuers [and] require that the tokens be fully backed by cash or Treasury securities,” he said. If bank regulators so choose, he added, they could impose requirements for capital and liquidity, including how, where and what chains stablecoins are traded on, while ensuring that “those chains have adequate resilience and procedures.”

Read more: Jump Crypto Is Unnamed Firm That Made $1.28B From Do Kwon’s Doomed Terra Ecosystem: Sources