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SEC Clarifies Why Terra Luna Classic, Polygon & 3 Other Crypto Are Securities

Published

4 months ago

July 15, 2024

Coin2049 Newsletter

In a recent litigation filed by the SEC against Consensys, the Securities and Exchange Commission has clarified its stance on the classification of several prominent cryptocurrencies as securities. These include Terra Luna Classic (LUNA), Polygon (MATIC), The Sandbox (SAND), Chiliz (CHZ), and Decentrland (MANA). This legal action underscores the SEC’s contention that these digital assets were initially offered and sold as investment contracts.

Hence, the SEC believes these cryptocurrencies fall under the regulatory purview of securities laws. For context, Consensys, a major player in the crypto space, has been targeted for allegedly facilitating the trading of these assets through its MetaMask Swaps platform.

The US SEC argues that each of these tokens was marketed with promises of future profits derived from the efforts of the issuing entities, Consensys and related third parties. This expectation of profit was cultivated through various means. These include public statements, marketing materials, and the operational strategies outlined by the token issuers.

Agency Explains Why Certain Crypto Are Securities

One of the tokens in question is MATIC, the native token of Polygon, an Ethereum scaling blockchain platform. Moreover, Polygon positions MATIC as essential for network transactions and governance, incentivizing holders through staking mechanisms and other economic activities.

Hence, the SEC contends that since its inception, MATIC has been marketed and sold as an investment vehicle. It mentions that investors expect an increase in MATIC value driven by Polygon’s ongoing development and expansion efforts. They highlighted the details on MATIC’s whitepaper to prove their point.

The whitepaper read, “Matic Tokens are expected to provide economic incentives on the Matic Network [now Polygon]…Without Matic Tokens, there is no incentive for users to expend resources to participate in activities or provide services to the overall ecosystem on the Matic Network.”

Polygon also revealed funding raised from renowned and celebrity investors. In addition, Sandeep Nailwal, co-founder of Polygon, wrote in a November 2022 tweet, “I won’t rest until Polygon gets the ‘top 3’ spot it deserves (alongside BTC and ETH). No other project comes close.” The marketing and statements by the co-founder has also influenced the SEC’s decision.

Similarly, MANA, the digital currency of Decentraland, a virtual reality platform on Ethereum, has been categorized as a security by the SEC. MANA facilitates transactions within the Decentraland ecosystem and grants holders rights to participate in governance and content creation.

The SEC pinpointed the sale of MANA tokens during its ICO and subsequent trading activities on platforms like MetaMask Swaps. Moreover, the agency noted that these activities were conducted with the implicit understanding of potential profit from Decentraland’s platform growth and adoption.

Also Read: Breaking: South Korean Government Mulls 3-Year Delay on Crypto Taxes

Scrutiny On Terra Luna Classic, Chiliz & The Sandbox

Another token under scrutiny is CHZ, the utility token for Chiliz. It is used on the Socios platform for fan engagement in sports and entertainment. CHZ enables fans to purchase and influence decisions in their favorite teams through voting rights and rewards programs.

The SEC alleges that CHZ was promoted as an investment opportunity. It highlighted funds were raised explicitly earmarked for platform development, user acquisition, and marketing efforts. These factors all contributed to potential increases in CHZ’s value.

SAND, the token of The Sandbox, a virtual gaming platform powered by blockchain, is also highlighted in the SEC’s litigation. The SEC argues that SAND’s initial offering portrayed it as an investment vehicle. Hence, it is subject to securities regulations due to the expected returns tied to the platform’s success.

Lastly, Terra Luna Classic (LUNA), the native token of Terra, is included in the SEC’s classification as a security. LUNA facilitates stablecoin transactions and platform governance within Terra’s ecosystem. The SEC asserts that Terra Luna Classic’s issuance and trading involved expectations of profit. These expections were based on Terraform’s development efforts and market adoption of Terra’s stablecoin solutions.

The SEC also highlighted that in 2021, Terraform’s head of business development deemed Terra Luna Classic “equity” in their company. Moreover, Terraform CEO Do Kwon once wrote, “LUNA value is viable in the long run — growing as the ecosystem grows.” A director stated in June 2021 that “owning LUNA is essentially owning a portion of the network.”

Additionally, Terraform’s marketing emphasized their team’s expertise. These factors led the Federal Court for the Southern District of New York to rule on December 28, 2023, that LUNA and wLUNA were sold as investment contracts. Moreover, the SEC seeks to stand by this ruling.

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