Although the U.S. Government under President Trump has flipped the script on its approach to cryptocurrency in just a matter of weeks, one big question that is still out there is will the courts chill the recent enthusiasm of the crypto community. If Judge Torres’ decision in Donovan, et al. v. GMO-Z.com Trust Company, Inc. in the SDNY is any indication, the crypto community can continue to celebrate a more thoughtful approach to crypto. Judge Torres dismissed Plaintiffs’ securities claim that they purchased an unregistered security—GMO’s stablecoin (GYEN)—on secondary exchanges Binance and Coinbase. This is only the third reported decision analyzing whether a stablecoin is a security and is consistent with Judge Rakoff’s Terraform decision and Judge Jackson’s District of Columbia Binance decision.

Plaintiffs claimed that they purchased GMO’s GYEN stablecoin at a temporarily higher price and that the stablecoin then lost significant value when it returned to its standard yen value (GYEN is pegged to the value of the Japanese yen). Judge Torres, in analyzing GMO’s motion to dismiss, focused her analysis of whether GYEN was a security on the third prong of the Howey test, which asks whether in the “totality of the circumstances, a reasonable participant in the alleged scheme, contract, or transaction would have been ‘led to expect profits solely from the efforts of the promoter’ or other third parties.” Judge Torres stated “the question, then, is whether Plaintiffs’ complaint alleges that a reasonable purchaser of GYEN on Binance or Coinbase would expect to earn profits derived from the entrepreneurial or managerial efforts of others.”

The Court concluded the answer was no. Cataloging other cryptocurrency decisions where the court found that purchasers expected to earn profits derived from the efforts of others, Judge Torres held that “[t]he facts alleged here share little in common with the facts presented in those cases.” “Plaintiffs allege that they purchased a fiat-collateralized digital asset that was explicitly marketed and advertised as holding a ‘stable’ value, ‘pegged to [JPY] at a rate of 1-to-1.’” Judge Torres held that “Plaintiffs do not allege that a reasonable person would expect to earn any ‘income or return, to include, for example, dividends, other periodic payments, or [an] increased value of [GYEN]’ derived from the popularization of the digital asset or the development of the Ethereum blockchain on which it operates.” “Indeed, if a GYEN purchaser on Binance or Coinbase were to believe GMO Trust’s marketing of the coin, they would believe that the value of their GYEN would be wholly dependent on the value of JPY” and therefore “[a]ny purchaser could not, therefore, reasonably expect to earn a profit derived primarily from the entrepreneurial or managerial efforts of GMO Trust or any other third parties promoting the asset or the blockchain technology on which it operates.”

Judge Torres rejected a host of arguments from Plaintiffs that purchasers believed the value of GYEN would increase based on alleged efforts of GMO Trust, finding in part that “[m]inisterial, technical, and clerical tasks often are ‘necessary’ for an investment scheme to operate and thereby generate a profit, but courts have long found such efforts to be insufficient under Howey’s third prong” because the effort of others must be the “undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”

Judge Torres distinguished Judge Rakoff’s decision in Terraform on the facts stating that “the ‘stablecoin’ at issue in Terraform bears no resemblance to GYEN.” There, the court had found that offers and sales of the UST stablecoin were investment contracts “because, unlike GYEN, the non-collateralized UST conferred rights on purchasers to ‘convert’ the token to a different type of digital asset offered by Terraform, which was ‘pitched to investors . . . primarily as [a] yield-bearing investment[] whose value would grow in line with [adoption of] the Terraform blockchain ecosystem.” Judge Torres stated that “[t]he Terraform court found that UST was, therefore, for all practical purposes, indistinguishable from, and part of the same overall scheme, as the yield-bearing digital asset to which it was designed to be readily converted.” Judge Torres also noted that UST was promoted in connection with Terraform’s Anchor Protocol, which was “touted as being capable of being able to generate future profits of as much as 20% . . . . No such allegations are present here.” Although not mentioned in Judge Torres’ decision, Judge Rakoff had noted in an earlier decision in the Terraform case that “where a stablecoin is designed exclusively to maintain a one-to-one peg with another asset, there is no reasonable basis for expecting that the tokens—if used as stable stores of value or mirrored shares traded on public stock exchanges—would generate profits through a common enterprise.”

Judge Torres’ decision is also consistent with the District of Columbia’s decision in Securities and Exchange Commission v. Binance Holdings Limited et al. from June of last year that dismissed the SEC’s claim that Binance’s stablecoin BUSD, pegged 1:1 to the U.S. dollar, was a security.

Although this is just the decision of one federal district court judge—and one that has been friendly to crypto in the past—it is notable in that it is in the SDNY where a majority of the crypto litigation is filed and Judge Torres’ reasoning as to whether this particular stablecoin is a security can and should apply to all fiat-collateralized stablecoins. This rationale, if adopted by other courts, could set forth an analytical framework that would set most stablecoins off as non-securities, in a world where most courts and the SEC—until very recently—held that most crypto assets are securities. That remains to be seen, but for now, fiat-collateralized stablecoins should feel more confident after Judge Torres’ decision.