Crypto Firm Terraform Reveals SEC Subpoena — as It Sues SEC

Crypto Firm Terraform Reveals SEC Subpoena — as It Sues SEC

Terraform Labs, a Singapore-based crypto firm offering synthetic stocks on its blockchain, disclosed that the U.S. Securities and Exchange Commission had subpoenaed its chief executive officer while he attended a conference in New York. It made the revelation in a lawsuit Terraform itself filed against the SEC in response.

Terraform says in its suit that the SEC’s process server approached Do Kwon, who is a resident of South Korea, in September as he was on his way to give a presentation at the “Mainnet 2021” summit. The subpoenas are among the latest efforts by U.S. authorities to assert their purview over crypto companies even when based abroad as they seek to extend its global reach over the industry. Kwon’s and Terraform’s attorneys argue that the subpoenas were an improper attempt by the SEC to claim jurisdiction. 

“It’s a clever effort to try to quash this subpoena, but I’m not aware of a case like this being successful,” said Gary DeWaal, an attorney for law firm Katten who previously was a senior trial attorney at the Commodity Futures Trading Commission, adding that courts are generally sympathetic to SEC subpoenas. DeWaal said that if Terraform’s effort is successful, the SEC can still pursue the information but would have to work with the foreign governments where Kwon and the company are based.

The SEC didn’t immediately respond to an emailed request for comment from Bloomberg News.

Link to lawsuit document 

Terraform created the Mirror Protocol, which offers synthetic versions of stocks such as Tesla Inc. and exchange-traded funds like the Ark Innovation ETF. Terra’s LUNA token is currently the 12th-biggest cryptocurrency and has a market value of about $17 billion.

Kwon in May had voluntarily consented to an interview requested by the SEC’s enforcement division, the lawsuit said. After the interview, the SEC sought documents from Kwon and the company, in a request that the lawsuit claimed was overly broad and didn’t make sense. In September, the SEC told Kwon’s lawyers that they believed sanctions against the company were warranted and soon after served Kwon with the subpoena in New York, the lawsuit said. 

Terraform’s tussle with the SEC comes as authorities continue a broad crackdown on crypto companies that they allege have violated U.S. law. The CFTC earlier this month ordered British Virgin Islands-based Tether to pay $41 million for lying about the backing of its token. U.S. authorities have also pursued investigations against crypto exchange Binance, which also says its operations are outside the U.S. In many cases, U.S. authorities have claimed jurisdiction because the companies allegedly have U.S. citizens who are customers.

U.S. regulators have also taken greater interest in the decentralized finance, or DeFi, space in recent months as asset values grow and more products come into the market. Unregulated crypto markets “will not end well” if they stay outside the purview of regulators, SEC Chairman Gary Gensler said last month. 

Kwon had told The Defiant last month that he had not been served at the conference.

Terraform isn’t the only crypto company pushing back against the SEC and it comes as other players in crypto question whether existing regulatory norms and conventions should even apply when policing the industry. Coinbase Global Inc. accused the agency of “sketchy behavior” with regard to talks about a potential crypto-lending product. And Ripple Labs Inc. has said the SEC is engaging in “continued warfare” with crypto assets.

CoinDesk reported the lawsuit earlier.

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