Do Kwon and Terra Lose Appeal to Thwart SEC’s Investigation

June 12, 2022

Reading Time: 3 minutes

According to the media report earlier this month, the US Securities and Exchange Commission enforcement attorneys are investigating whether Terra Labs, the company behind the TerraUSD violated the federal investors-protection regulations.

The UST stablecoin is supposed to maintain a 1-to-1 peg to the US dollars, however, a shock wave was sent across the crypto community last month, an event that left many crypto enthusiasts in fear of possible occurrence on other stablecoins.

While regulators have been looking into why Terra collapsed, the Securities and Exchange Commission (SEC) has also been on its toes to probe Terra Labs and the CEO, Do Kwon for alleged violation of federal securities laws related to Mirror Protocol, a blockchain technology.

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The U.S. Court of Appeals for the Second Circuit agreed with the U.S. District Court for the Southern District of New York’s order granting the Securities and Exchange Commission’s application requiring compliance with investigative subpoenas for documents from the company and Kwon, and testimony from the latter.

The order which acknowledged the jurisdiction of a US agency over a South Korean citizen and Singaporean company concerning blockchain technology marks an increasingly global reach sought by authorities when it comes to digital assets. In May, a Singaporean court placed a proprietary injunction on a non-fungible token that is enforceable globally. 

Compared to the Singaporean legal institution’s ability to enforce its order, U.S. agencies have wide cooperation agreements with authorities worldwide with the US’s central role in the global financial system granting it outsized privileges in law enforcement.

Last year September, the subpoenas were first served to Do Kwon in New York which was part of the SEC’s investigation into whether the two federal securities laws were violated in their process of creating and offering to sell various virtual assets related to Terraform’s decentralized finance (Defi) service. The Mirror Protocol offered investors digital currencies that mirror the price of US stocks such as Amazon or Google.

In response to SEC’s investigation, Terraform Labs and its CEO said that SEC did not follow proper procedures in serving the subpoena and neither did the US markets regulator have jurisdiction over them, an argument rejected by the appeal court.

“Appellants purposefully availed themselves of the U.S. by promoting the digital assets at issue in the SEC’s investigation to U.S.-based consumers and investors,” the circuit judges said in their order.

Terraform Labs had seven “purposeful and extensive” contacts — promoting the Mirror Protocol tokens to the investors based in the country, retaining employees there, and entering into agreements with entities based in the US. Also, 15% of Mirror Protocol users were based in the country, according to the order.

The order however does not relate to Do Kwon’s alleged involvement in the multibillion-dollar Terra-LUNA crash but might fall within the SEC’s scope given its fallout on US investors.

In a report by South Korea’s local media JTBC, the SEC had already begun investigating Terraform’s core developers on the collapse, and Kwon, under suspicion of money laundering.

After briefly making his account private, Kwon said via his verified Twitter handle that “we will soon be more proactive in communicating with the press & getting the right information out there.” 

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