Terraform Labs Compelled To Cooperate With SEC’s Mirror Protocol Probe

Terraform Labs and Do Kwon have filed an appeal against the SEC’s Mirror Protocol subpoenas. According to a summary order filed yesterday, the Second Circuit upheld the subpoenas.

According to a judgment issued on Wednesday by the US Court of Appeals for the Second Circuit, Terraform Labs and its CEO, Do Kwon, must respond to SEC subpoenas relating to the Mirror Protocol. The Securities and Exchange Commission is looking into whether Terraform and Kwon were selling unregistered securities through the Mirror Protocol, which allows users to trade crypto tokens that mirror big stocks like Apple and Amazon.

In September 2021, the regulator served Kwon with papers during Messari’s crypto conference, Mainnet, in New York. Kwon and Terraform filed an appeal, claiming that the SEC broke its regulations by serving Kwon in person and that the court lacked jurisdiction owing to Terraform’s lack of US presence.

Both arguments were rejected by the court. It was discovered that the SEC followed the procedures and that Terraform’s counsel was not allowed to receive filings, which is why Kwon was served in person.

According to Terraform’s interpretation of the regulations, it would generate “absurd results by allowing a party to insist on service through counsel but allowing the party to block said service by not authorizing their counsel to receive any filings.”

The court upheld the judgment that there were seven connections with the United States in the second element. It claimed that Terraform Labs and Kwon pushed the tokens to US-based users and investors, that they kept US personnel, and that they had trading arrangements with US-based organizations (noting one $200,000 deal with an unnamed exchange). According to the petition, when negotiating with one company, they stated that 15% of Mirror Protocol users are headquartered in the United States. Arguments to the contrary were also disregarded by the court.

This case has nothing to do with the Terra blockchain’s massive collapse last month, which saw its native coin, Luna, experience a downward slide as its supply increased dramatically. This was owing to its association with the stablecoin TerraUSD (UST), which lost virtually all of its value after losing its peg to the US dollar. Both projects saw their market capitalization plummet by about $40 billion.

Former holders received a token airdrop after the blockchain was recreated. However, investors only regained a portion of what they lost.