SEC Acts Against Terraform Labs Regarding Mirror Protocol

Mirror Protocol’s ‘mAssets’, a synthetic asset protocol does not sit well with the SEC as the regulatory body commences an action

Mirror Protocol 

The US Securities and Exchange Commission (SEC) announced on Friday that it has filed an action against Terraform Labs and its co-founder, Do Kown for contravening securities law. 

In a press release by the SEC, the violation is in the Mirror Protocol launched in 2020, “Terraform Labs launched the Mirror Protocol in 2020, through which users may create and trade digital assets referred to as mAssets that “mirror” the price of U.S. securities, and obtain Mirror’s “governance tokens” referred to as MIR tokens.”

The SEC is seeking an order directing Terraform Labs and Do Kwon to comply with investigative subpoenas for documents and testimony. The purpose of the investigation is to look into a potential violation of federal securities law which in broad terms is the failure to register the MIR tokens as securities with the authorities before engaging in security transactions. 

Source: The SEC’s suit is merely to compel testimony from Terraform Labs and Do Kwon as part of its investigation process

Negotiations with the SEC

The latest suit by the SEC is linked to an action filed by Do Kwon and Terraform Labs against SEC last month. This came after SEC’s attempts to negotiate with Terraform failed says the SEC. The main contention raised in that action is the violation of SEC rules and the constitutional rights of Do Kwon. The subpoena is said to be ineffective for failing to obtain a specific order authorizing service on Do Kown. 

The CEO of Terraform Labs was served with a subpoena at the Messari Mainnet Conference in New York. The SEC is seeking documents on Terraform’s marketing and promotion of the Mirror Protocol, its agreement with third parties on the sale of tokens, and its communication with investors. 

Time to Address the Real Issue

The main criticism leveled against the SEC and other regulatory bodies is the failure to implement a coherent and inclusive regulatory framework. The authorities appear to impose regulatory obligations on a piecemeal basis and justify it on archaic laws. The law on the definition of security is determined through the Howey’s Test, a precedent set in 1946 in the case of SEC v. W.J. Howey Co. Unless there is legislative intervention or a new judicial pronouncement by the Supreme Court, crypto-related activities may be deemed illegal and this impedes development. 

The regulatory issues surrounding the Mirror Protocol have been addressed by Do Kwon previously and he took the position that waiting for a fragmented regulatory framework to crystallize will take time whilst innovation will have to move on. 

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