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Terraform Labs Files Lawsuit Against SEC After Receiving Subpoenas

2 mins
Updated by Kyle Baird
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In Brief

  • Terraform is suing the SEC for violation of certain rules relating to an earlier subpoena handed to Terraform.
  • The SEC subpoenaed Terraform for potential violations that have to do with its Mirror Protocol.
  • Mirror Protocol tracks real-world assets like stocks, and the SEC is examining these synthetic assets.
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Terraform co-founder and CEO Do Kwon and Terraform Labs is suing the SEC for conduct that could be in violation of rules. Terraform Labs’ lawsuit follows subpoenas issued by the SEC that have to do with the former’s Mirror Protocol.

The co-founder and CEO of Terraform Labs, Do Kwon, spoke more of the subpoena that the project received from the U.S. Securities and Exchange Commission (SEC) and the project’s subsequent lawsuit against the SEC. The CEO was speaking to Yahoo Finance at the All Markets Summit held on Oct 25.

Terraform on the offensive

A lawsuit filed on Oct 22 shows that Terraform is suing the SEC to challenge the agency’s subpoenas that relate to the project’s Mirror Protocol. The latter allows users to trade synthetic versions of real-world assets, including equity. This includes shares from the largest companies in the world, including Amazon, Apple, Microsoft, Netflix, and Tesla.

The SEC believes that there may be issues relating to the Mirror Protocol. The lawsuit itself reads,

In a conversation on September 15, 2021, the SEC attorneys advised that they believe that some sort of enforcement action was warranted against TFL [Terraform Labs] and any cooperation, and implementation of remedial actions as to the Mirror Protocol, would result in a reduced financial sanction as part of any consent agreement.

Terraform’s lawsuit argues that the SEC violated rules by hiring a private company to deliver the subpoena, which occurred at a public conference. Terraform’s filing reads,

In addition to violating its rules regarding service, the SEC’s conduct here violated its rules requiring it to keep formal orders of investigation confidential.

SEC Chair Gary Gensler said that such tokens, which represent stocks must subscribe to securities laws, and that appears to be a firm position held by the SEC. Other governments in this world, including those in Europe and Asia, are taking this position, which led to Binance delisting stock tokens.

SEC bearing down on securities that may be unregulated

The Terraform subpoenas issued by the SEC are just the latest in the regulator’s accelerating bid to regulate the crypto market. It has subpoenaed projects more than usual this year, and this list includes Circle and Ripple.

The SEC does not want to allow assets that are potential securities to violate any existing laws. However, given that the market has thousands of mostly decentralized projects, the challenge is clear — and something that Gensler believes is not viable. He said that this was similar to the wildcat banking era of the mid-19th century when thousands of currencies existed.

But the silver lining for investors is that the SEC is not aiming to outlaw cryptocurrencies. They have been firm about implementing regulation, but will not legislate draconian restrictions. Gensler even outlined something of an agenda to the Washington Post, calling for regulation that strongly focused on investor protection.

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Rahul Nambiampurath
Rahul Nambiampurath's cryptocurrency journey first began in 2014 when he stumbled upon Satoshi's Bitcoin whitepaper. With a bachelor's degree in Commerce and an MBA in Finance from Sikkim Manipal University, he was among the few that first recognized the sheer untapped potential of decentralized technologies. Since then, he has helped DeFi platforms like Balancer and Sidus Heroes — a web3 metaverse — as well as CEXs like Bitso (Mexico's biggest) and Overbit to reach new heights with his...
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