- The Terra blockchain co-founder Do Kwon and the Terraform Labs are now on the SEC’s radar for allegedly repeatedly failing to respond to its subpoenas.
- Kwon says he is surprised by the lawsuit and he has also filed a lawsuit against the regulator for its ‘inappropriate’ serving.
The US Securities and Exchange Commission (SEC) is staying true to its promise of battling alleged unregistered securities as shown by its latest action against the Terra blockchain. The regulator is now going after Terraform Labs – the company behind Terra, and its co-founder and CEO Do Kwon.
As per the litigation release, the SEC delivered to Kwon a series of subpoenas, which he has failed to address. The regulator now seeks to compel the company to comply with the summons that petition for Kwon’s testimony. The investigative subpoenas also call on the production of several documents by Terraform Labs.
Launched in December 2020, Mirror Protocol is a DeFi protocol built on Terra’s blockchain. It is used to mint, issue, and trade synthetic versions of stocks, or Mirrored Assets (mAssets), which track the price of real-world assets. For instance, rather than purchasing Tesla shares, one can buy mTSLA. These assets, according to Kwon, ease global investors’ access to the US equities market.
Terra Blockchain and the SEC
Following investigations, the regulator now has reason to believe that Terraform Labs and Do Kwon “participated in the creation, promotion, and offer to sell mAssets and MIR tokens to U.S. investors.” Such actions are likely in violation of US federal laws which forbid the selling or offering of unregistered securities or being an unlicensed securities broker. Nonetheless, the litigation release reads that:
The SEC is continuing its fact-finding investigation and, to date, has not concluded that any individual or entity has violated the federal securities laws.
Should the SEC produce any confirmation of these speculations, Terraform and Kwon would find themselves in a similar fate to Ripple Labs and XRP.
In retaliation, the Terra CEO has filed a lawsuit contesting the environment in which the subpoenas were served. Kwon was served the documents while presenting at a September Messari Mainnet cryptocurrency conference in New York. The happening became the subject of the Crypto Twitter buzz with many wondering who exactly got served.
According to Kwon’s legal counsel, such delivery was illegal since it took place in public. This, the legal advisory says, is an infringement of the SEC’s policy that states that serving should happen confidentially.
Additionally, Kwon’s filing says he has been in communication with the SEC since some time ago. The commission’s actions, therefore, come as quite a surprise to him.
MIR and LUNA price movements
The Mirror Protocol token, MIR, was trading at $3.11 at press time, having lost 2.5 percent in the day per our data. The token hit its all-time high around mid-April when it traded at $12.40. Terra, the stablecoins ecosystem which recently introduced an 88.7 million token burn, saw its native token trading at $51.02, down 0.3 percent in the day.
SEC Chairman Gary Gensler Stresses Crypto Markets Are Open to Manipulation, Investors Vulnerable
The chairman of the U.S. Securities and Exchange Commission (SEC), Gary Gensler, has called for more investor protection in crypto markets. “This asset class is rife with fraud, scams, and abuse in certain applications,” he said. “In many cases, investors aren’t able to get rigorous, balanced, and complete information on tokens or trading and lending platforms.”
Gary Gensler Wants More Investor Protection in Crypto Markets
SEC Chairman Gary Gensler raised concerns about the cryptocurrency markets at an Investor Advisory Committee meeting last week.
The Investor Advisory Committee, established by Section 911 of the Dodd-Frank Act, advises the SEC on regulatory priorities, including “initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace.”
During his speech, Gensler shared some concerns regarding the crypto markets.
He began by acknowledging that “Satoshi Nakamoto’s ‘Bitcoin Whitepaper’ and the crypto markets that followed have been catalysts for change.” In August, Gensler said Bitcoin’s pseudonymous creator’s “innovation is real” and “it has been and could continue to be a catalyst for change in the fields of finance and money.”
Citing the market cap of all cryptocurrencies, Gensler told the Investor Advisory Committee: “This is an asset class that belongs inside public policy frameworks of looking after investors, guarding against illicit activity, and protecting our financial stability.” He opined:
Unfortunately, this asset class is rife with fraud, scams, and abuse in certain applications … In many cases, investors aren’t able to get rigorous, balanced, and complete information on tokens or trading and lending platforms.
“Right now, we just don’t have enough investor protection in crypto,” the SEC boss described. “The American public is buying, selling, and lending crypto on trading, lending, and decentralized finance (defi) platforms, where there are significant gaps in investor protection.” He stressed:
This leaves markets open to manipulation. This leaves investors vulnerable. If we don’t address these issues, I worry a lot of people will be hurt.
Gensler proceeded to explain that many crypto “tokens are offered and sold as securities.” Commenting on whether a token is considered as a security, he said: “There’s actually a lot of clarity on that front. In the 1930s, Congress established the definition of a security, which included about 20 items, like stock, bonds, and notes.”
The SEC chairman continued: “One of the items is an investment contract,” noting that many tokens in the crypto markets “may be unregistered securities, without required disclosures or market oversight.”
It’s best not to wait for a big spill on aisle three — the crypto aisle, with all its tokens, trading and lending going on — to clean up the investor protection issues.
The SEC chair concluded his speech by stating that crypto platform operators and token issuers should “come in and talk to the staff at the SEC.”
He added: “Financial innovations throughout history don’t long thrive outside of our public policy frameworks. If this field is going to continue, or reach any of its potential to be a catalyst for change, we’d better bring it into public policy frameworks.”
SEC’s Investor Advisory Committee to Discuss Crypto on December 2
- SEC’s Investor Advisory Committee will soon discuss crypto and digital assets today.
- This is to ensure serene investor protection and market integrity in the face of new technologies.
The US SEC’s Investor Advisory Committee is on its heels to discuss their nagging concern about crypto and ‘Investor Protection’ on December 2, 2021.
Truth be told, the panel will highlight all the ins and outs of digital assets with a special focus on the regulatory framework that governs them. With no exemption, the authority will take on this event to explore and identify the main lines of intersection of digital assets, sooner rather than later.
They hope to do this with a specific lens to examine the ups and downs of the market issues. Prior to this, the committee will further define the compounding risk and its associated dangers in the emerging technologies in the crypto market.
The SEC's Investor Advisory Committee will be discussing crypto tomorrow. It's a good opportunity for the Commission to rethink its approach to crypto regulation: https://t.co/0OQ5ig3VmP You can submit comments here: https://t.co/WDGSTZ3uhs— Hester Peirce (@HesterPeirce) December 1, 2021
On this note, apart from the crypto discussion, the panel will address various topics regarding blockchain technology, stablecoins, and crypto-based ETFs. All these topics will be treated publicly in one holistic manner under the event.
Moreover, the meeting agenda is quite a solid move that seeks to ensure smooth market integrity. In essence, it aims to also empower a good outlook when it comes to investors’ protection, particularly in the face of new technology.
People think that this occasion is a good opportunity for the SEC to rethink and restructure its harsh crypto regulation approach.
SEC Chair: Innovation Around DeFi “Could Be Real”
Gary Gensler believes that DeFi could offer “real innovation,” but he is convinced that the sector will not survive without regulatory compliance.
U.S. Securities and Exchange Chair Gary Gensler said that new technologies do not tend to persist if they fail to come into compliance with the law during a fireside chat with Jay Clayton at the Digital Asset Compliance & Market Integrity Summit.
While Gensler believes that decentralized finance could be the source of innovation, he claims that it has to fall within the existing regulatory framework:
The innovation around DeFi could be real, but they won’t persist if they stay outside of the regulatory framework.
Gensler also voiced his concerns about the centralization of some DeFi projects and implied that the goal of such projects might be to skirt existing anti-money laundering laws.
Speaking of the regulator’s reluctance to approve a spot Bitcoin exchange-traded fund, Gensler told No. 42 that trading around the globe is not inside the U.S. regulatory register. He urged the trading and lending platform to “come in and talk”:
Trading and lending platforms are really in an important place for investor and consumer protection. Come in and talk to us… work with us. Where appropriate we’ll use the enforcement tool. Work to get registered with the law.
The SEC boss has reiterated that stablecoins remind him of poker chips at a casino:
[Stablecoins] made it more efficient within the ecosystem. But it also allowed people around the globe, the people who tried to, to avoid money laundering and tax compliance in jurisdiction after jurisdiction.
According to Gensler, stablecoins are responsible for 80% of trading on the crypto market.