Terraform Labs and Do Kwon Ordered To Comply With SEC Subpoena

The latest legal setback for Do Kwon stems from an SEC investigation into TFL’s Mirror Protocol

article-image

Blockworks Exclusive Art by Axel Rangel

share

key takeaways

  • The ruling is unrelated to the collapse of TerraUSD
  • Do Kwon, who now lives in Singapore, had argued the SEC has no jurisdiction over him

Do Kwon, the infamous founder and CEO of Terraform Labs, is now fighting legal fires on multiple fronts. 

The company and its founder may have legal liability in the wake of the failure of stablecoin TerraUSD (UST) last month. A US federal judge has ordered Kwon to comply with an earlier SEC subpoena that he sought to avoid.

The SEC began investigating a Terraform Labs project, Mirror Protocol, last year and served Kwon a subpoena at a New York conference on Sept. 20, 2021, court filings show.

Mirror, a decentralized finance (DeFi) protocol on the Terra blockchain, enabled users to mint synthetic assets that mirror the price of securities such as TSLA and GOOGL, using UST as collateral. Since the UST depeg, the project has been in disarray, unable to operate as designed, absent a functioning stablecoin. Mirror’s governance has also been unable to reach a quorum on proposals, and its developers remain quiet.

Kwon initially denied he had been served at all, but when the truth came out, he took the bold step of suing the SEC — his attorneys argued the service was improper.

A district court concluded the SEC complied with its rules, and that the agency has sufficient jurisdiction. The 2nd US Circuit Court of Appeals upheld that ruling on Wednesday, rejecting Terraform Labs (TFL) and Kwon’s appeal.

Kwon’s legal counsel told the court that Kwon had never authorized said counsel to receive subpoenas, rendering the agency’s argument moot.

“Appellants’ reading of the Rules is contrary to the text and would produce absurd results by allowing a party to insist on service through counsel, but allow the party to block said service by not authorizing their counsel to receive any filings,” the appeals court wrote in its decision.

The district court also concluded it had personal jurisdiction over TFL and Kwon, citing seven criteria linking their actions to the US. Notably, the court ruled TFL promoted the protocol’s tokens to US-based consumers and investors, retained US employees and even paid an unnamed exchange $200,000 to list the tokens for trading.

“Appellants’ arguments to the contrary are unpersuasive,” the court wrote.

The ruling specifically does not address whether Terra’s digital assets are securities under US law.

Mirror Protocol has yet to announce whether it will relaunch on the new incarnation of the Terra mainnet, which went live on May 27, 2022, following a community vote.

Mirror’s token MIR is down over 98% from an all-time high in May 2021, trading at $0.24 as of 12:15 pm ET, according to CoinGecko.

TFL representatives did not immediately return a request for comment.


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 18 - 20, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Flashnote Template Presentation (2).jpg

Research

With the recent election, it’s clear that there will be a meaningful shift in crypto regulations and legislation. Trump is likely as pro-crypto as a president can be. He launched (multiple) of his own NFT collections and is launching an Aave wrapper called World Liberty Fi. He has also spoken out and mentioned that he wants to make the United States "the crypto capital of the planet" and transform it into the "Bitcoin superpower of the world". He proposed creating a strategic national Bitcoin stockpile alongside support from Senator Cynthia Lummis, promising to retain 100% of all Bitcoin held by the U.S. government. More importantly, we’re likely to see deregulation across the board in a lot of industries, with crypto being one of them - as Trump has committed to keeping the crypto market largely unregulated. Crypto, DeFi in particular, has historically been knee-capped by overreaching and hostile governmental agencies and regulation by enforcement, as evidenced by the plethora of Wells notices and lawsuits over the past few years. With Donald Trump winning the presidency, Republicans taking control of the Senate, and being on the verge of securing the House, we think it’s likely that crypto realizes positive regulatory clarity. Below, you can find our analysts’ takes:

article-image

Solana is the crowd favorite to potentially flip Ethereum somewhere down the line, and it tends to feel realistic at times

article-image

Of course, a lot has happened since the 600+ survey respondents shared their thoughts between Aug. 15 and Oct. 1

article-image

AI’s future shouldn’t be decided by a handful of tech giants

article-image

A look at software wallet Exodus may show how an SEC shakeup could have a real impact on industry companies

article-image

Co-chairing Trump’s transition team to help fill administration positions is Cantor Fitzgerald CEO Howard Lutnick

article-image

Reflect is a delta-neutral currency protocol that lets tokens accrue yield without touching the banking system