Terra Stablecoin Meltdown Spurs Investor Suit Against Binance.US

Chris Dolmetsch, Bloomberg News

(Bloomberg) -- Binance.US was sued by an investor in TerraUSD who claims the cryptocurrency exchange flouted federal regulations, with “disastrous consequences” for its customers when the stablecoin crashed last month.

Jeffrey Lockhart, a resident of Utah, filed the lawsuit on Monday in federal court in San Francisco against BAM Trading Services Inc., which does business as Binance.US, alleging the exchange failed to disclose that TerraUSD is a security. He is seeking an injunction blocking Binance from offering it for purchase or sale unless it is registered as such, as well as unspecified damages. He is also seeking to represent a class of investors like himself.

“Investors who purchased UST on Binance US were wiped out, learning quickly that, contrary to Binance’s U.S. advertisements, UST was not ‘safe,’ ‘stable,’ or ‘fiat-backed,’” Lockhart said in his suit, adding that Binance had taken down the ads, “effectively conceding that UST was none of those things.”

TerraUSD was meant to maintain a 1-to-1 peg to the US dollar through an algorithm and trading in a related token called Luna. Because of their peg, stablecoins can act as a haven for investors in the volatile cryptocurrency market.

Read More: SEC Investigating UST Stablecoin Blowup in Fresh Threat to Terra

But since the stablecoin wasn’t registered as a security, investors lacked disclosures to protect them, Lockhart said.

Bloomberg News reported last week that the US Securities and Exchange Commission is investigating whether the marketing of TerraUSD violated rules instituted to protect investors. Terra’s implosion last month was one of the biggest in crypto history, wiping out tens of billions of dollars in value and sending shock waves through markets.

Lockhart said in his suit that Binance sold TerraUSD even though there is no securities registration statement for it and that Binance itself has failed to register with the SEC as a securities exchange or broker-dealer. In addition, he said, Binance has continued to sell securities created by Singapore-based Terraform Labs and “added insult to injury” when it started selling Luna 2.0, a new token controlled by Terraform, on May 31.

“Even though UST and LUNA are both securities, neither is registered with the SEC nor any state regulator,” according to the lawsuit. As a result, Lockhart argues, buyers are deprived of “the precise disclosures designed to avoid a repeat of the 1929 stock market crash and the Great Depression that followed.”

The case is Lockhart v. BAM Trading Services Inc., 22-cv-3461, US District Court, Northern District of California (San Francisco).