Do Kwon, one of the co-founders of crypto-focused project Terraform Labs, spoke out against a lawsuit filed by the U.S. Securities and Exchange Commission (SEC). He said that the regulatory body was “out of bounds” in pursuing its legal action against the firm, alleging that it had committed fraud through the sale of its digital asset.
The SEC’s complaint, filed at the end of September, accused the South Korea-based firm of conducting an unregistered securities offering related to its native token, LUNA. It alleges that Terraform Labs sold $26 million worth of LUNA tokens to U.S. investors without fulfilling the necessary regulatory requirements.
However, Kwon argued in a blog post that Terraform Labs did not violate any U.S. securities laws since the token sale never actually took place on American soil. The tokens were only available for purchase by overseas investors, he said.
He went on to state that Terraform Labs held no responsibility for the actions of third-party crypto exchanges that carried out trades of LUNA tokens with U.S.-based customers, as the company had no control over the buying or selling decisions of these players. This argument, he said, further demonstrated why the SEC’s legal action was misguided.
Kwon’s post went on to criticize the SEC more broadly, calling it “out of bounds” in its pursuit of crypto-related legal cases. He wrote that the SEC’s regulatory framework for digital assets was “outdated” and “antiquated,” and that the agency was “playing a dangerous game of whack-a-mole” in its efforts to police the burgeoning crypto sector.
Moreover, he said the SEC was applying rules and regulations that were never designed to address the unique challenges of crypto assets. Instead, it was forcing crypto firms to adhere to standards that would stifle innovation and development in the industry, he argued.
Kwon isn’t the first crypto industry figure to criticize the SEC’s approach to regulating digital assets. Many players in the space argue that the SEC’s regulatory framework is too restrictive and leaves little room for innovation. They point out that the agency’s guidance on what constitutes a security token versus a utility token is often opaque and ambiguous, complicating compliance efforts for firms wishing to issue tokens.
Some also argue that the SEC’s enforcement actions unfairly target crypto firms without offering clear guidance on how they can go about complying with the agency’s complex and evolving regulations. This, they say, puts them at a disadvantage compared to traditional firms that have been subject to a more stable regulatory framework for decades.
Despite the criticisms leveled at it, the SEC has shown no signs of backing down in its pursuit of crypto firms that it believes have violated federal securities laws. In addition to Terraform Labs, the agency has filed numerous other lawsuits against firms in the space, often alleging that they carried out illegal securities offerings.
At the same time, the SEC has been under pressure to clarify its stance on crypto assets, particularly given the growing institutional interest in Bitcoin and other digital currencies. Earlier this year, the SEC’s new chairman, Gary Gensler, indicated that he was keen to revise the agency’s crypto regulatory framework to keep pace with the rapid changes occurring in the industry.
It remains to be seen whether Gensler’s tenure will result in more clarity and transparency for crypto firms navigating the SEC’s regulatory landscape. For now, the agency’s enforcement actions continue to generate controversy and debate within the crypto industry, with some hopeful that a more collaborative and open approach can be adopted going forward.
Crypto entrepreneur Do Kwon has found himself in the crosshairs of US regulators, who have accused him and his company, Terraform Labs, of securities fraud. However, Kwon’s lawyers are fighting back, arguing that the allegations are unfounded and that the stable coin at issue is, in fact, a currency and not a security.
The case, which has been filed in a US district court in Manhattan, concerns Terraform Labs’ stable coin, which is called UST. The coin is designed to maintain a stable value by being pegged to the US dollar, and its value is backed by a reserve of actual dollars held by the company.
The regulators allege that Kwon and Terraform Labs misled investors by stating that the coin was fully backed with US dollars at all times, when in fact the company had invested some of the reserve funds in volatile cryptocurrencies. This allegedly caused the value of UST to fluctuate and put investors at risk.
Kwon’s lawyers, however, are arguing that UST is not a security and is therefore not subject to federal securities laws. They say that UST is a currency that is used purely for transactions, just like any other currency. They also point out that US law prohibits regulators from asserting jurisdiction over digital assets in this case.
The lawyers have asked the judge to dismiss the case, arguing that it is an abuse of regulatory power and an attempt to regulate something that is not within the regulator’s remit. They say that the case could set a dangerous precedent for the cryptocurrency industry and could stifle innovation.
The case highlights the ongoing debate over how cryptocurrencies should be regulated. Some regulators argue that cryptocurrencies are a new form of asset that should be subject to traditional securities laws, while others say that they are a new type of currency that should be treated differently.
There is also a broader debate in the US over whether federal regulators should have more power to regulate cryptocurrencies. The Biden administration has made it clear that it wants to ramp up regulation of the cryptocurrency industry, and there are fears that this could stifle innovation and drive entrepreneurs out of the country.
For Kwon and Terraform Labs, the outcome of the lawsuit will be crucial. If they are found to have misled investors, they could face fines and other penalties, and their reputations could be damaged. However, if they are successful in having the case dismissed, they could set an important precedent that could limit the power of regulators to control the crypto industry.
Either way, the case is a reminder that cryptocurrencies are still a relatively new and untested form of finance, and that regulations around them are still evolving. As the industry continues to grow and mature, it is likely that there will be many more legal disputes and regulatory battles to come.