In a class action lawsuit filed Monday in the United States District Court for the Northern District of California, Binance.US (Binance), a major cryptocurrency exchange, was accused of misleading investors around of the Terra blockchain ecosystem.

This is the first major court case in the United States involving Terra, whose UST and LUNC tokens crashed in May, wiping out around $40 billion in investor funds.

The lawsuit alleges that Binance marketed Terra’s UST as a stablecoin (a digital asset tied to a certain value, like the US dollar), and that this misleading characterization and marketing ultimately left thousands of retail investors completely caught off guard as they had been under-prepared. and underinformed of the risks associated with their investments.

The lawsuit further alleges that Binance is an unregistered broker or exchange, in violation of securities law, given its listing of UST, which the lawsuit calls an unregistered security.

In a statement provided to CoinDesk, Kyle Roche, a founding partner of Roche Freedman (the law firm that filed the lawsuit) said, “[Binance] recklessly listed and promoted UST as a “safe” stablecoin for those looking to avoid the volatility of other cryptocurrencies. They, along with other exchanges that have listed UST, should be held accountable.”

Binance disputes the allegations made in the lawsuit, telling CoinDesk: “[Binance] is registered by FinCEN and complies with all applicable regulations. These claims are baseless and we will vigorously defend ourselves.

If the lawsuit succeeds in finding a centralized exchange guilty of advertising a token – rather than the organization that launched it – it will have broad implications for the shape of the digital asset market in the future, including a Increased scrutiny of the due diligence conducted by centralized exchanges before accepting tokens and other digital assets for listing on their platforms.

© 2022 Dinsmore & Shohl LLP. All rights reserved.National Law Review, Volume XII, Number 165