Story by Leo Schwartz

A federal judge sided with the U.S. Securities and Exchange Commission in a closely watched crypto case on Thursday, ruling that four crypto tokens offered by the failed Terraform Labs company—including UST and LUNA—constituted unregistered securities.

As the crypto industry battles regulators over how to classify digital assets, the decision is a setback for the sector’s interpretation of securities law and a departure from a separate decision by a different judge in the Southern District of New York over the token XRP.

In his 71-page decision, Judge Jed Rakoff wrote that there is “no genuine dispute” that the four crypto tokens offered by Terraform were securities because “they are investment contracts, arguing that defendants wanted to “cast aside decades of settled law,” citing the seminal Supreme Court precedent called the Howey test.

“Howey’s definition of ‘investment contract’ was and remains a binding settlement of the law, not dicta,” wrote Rakoff.

The trials of Do Kwon

During crypto’s bull run of 2021, Terraform Labs represented one of the most successful projects in the sector, raking in billions of dollars and backed by prominent investors in the space. With its so-called algorithmic stablecoin, UST, Terraform co-founder Do Kwon promised a crypto token that could maintain a $1 peg through a complicated system of distributing a secondary cryptocurrency called LUNA.

Less than a year later, UST lost its $1 peg in a spectacular meltdown in May of 2022, causing investors—including retail traders across the world—to lose their money. The prices for both UST and LUNA plummeted in a death spiral. Kwon was soon arrested in Montenegro, triggering an ongoing extradition fight between the U.S. and his home country of South Korea, with fraud charges brought by the U.S. Department of Justice.

In February 2023, the SEC sued Terraform Labs and Kwon, alleging that they orchestrated a multi-billion dollar securities fraud by offering unregistered securities, including UST and LUNA, as well as two other crypto tokens tied to the ecosystem, MIR and wLUNA.

In response, lawyers for the defendants made a similar argument to other crypto companies currently in legal battle with the SEC: U.S. securities law is antiquated, and crypto tokens do not fall under the traditional definition of the Howey test because they did not represent an investment in a common enterprise with the expectation of profit derived from the effort of others. UST, after all, was meant to maintain a $1 peg.

After U.S. District judge Analisa Torres ruled in a separate court case involving the crypto company Ripple—finding that its crypto token XRP itself was not a security, and that its sale only constituted an investment contract in certain contexts—lawyers for Terra filed a motion to dismiss.

Rakoff, the judge overseeing the Terra case, threw cold water on his colleague’s decision, dismissing the motion and rejecting the approach used by Torres to distinguish how different digital assets are sold.

Thursday’s decision furthers Rakoff’s argument that the sale of Terraform’s crypto assets constituted an unregistered security. Even with UST, the token meant to be pegged to $1, Rakoff argued that holders of the token could deposit the tokens in a proprietary protocol developed by Terraform to earn back a yield. The distinction, however, seems to support the argument that stablecoins that do not offer a yield would not constitute a security.

Rakoff left one matter of the case unsettled—the question of fraud claims related to UST’s depeg brought by the SEC. In his decision, Rakoff wrote that the SEC’s evidence for its allegations comes from third-party whistleblowers that should be heard before a jury. Furthermore, he argued that defendants have shown a “genuine dispute” over whether a “reasonable investor” would have found statements around UST’s depeg to be misleading. Part of the pending case will relate to the involvement of Jump, a prominent trading firm that served as one of Terra’s main backers.

The SEC has already appealed the Ripple decision to the U.S. Second Circuit Court of Appeals, and the issue of when a cryptocurrency is a security is likely to end up before the Supreme Court in the future.

The jury trial is scheduled to begin in January 2024.

This story was originally featured on Fortune.com by Leo Schwartz