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In the past few days, there has been a news that has stirred up public opinion, which is the event of a legal dispute between Terraform Labs and the US Securities and Exchange Commission (SEC). Although a lot of press has reported on this event, in general the information given is quite general and there are not many Insights in it. Therefore, in this article, with 30 short sentences, I will present the following contents about the above incident:
- Background as well as details of the incident.
- The impact of this event on the Terra ecosystem.
- And where will this dispute go?
Background and developments of the case
1. About a month ago, during the Messari Mainnet 2021 event, which gathered a lot of famous Leaders, Builders, Investors,… in the Crypto market, a famous speaker was represented by a lawyer. The US Securities and Exchange Commission (SEC) sent a subpoena that caused a stir.
In the American legal system, a subpoena is a written court order requesting the release of documents or court testimony.
2. At that time, outsiders had not known the details of that speaker until now, when it was confirmed that the person being subpoenaed was Do Kwon – CEO of Terraform Labs, the company that builds and develops the network as well as the ecosystem Terra.
3. The reason why Do Kwon was subpoenaed is that Terraform Labs is the developer Mirror Protocol, a protocol that allows the creation and trading of synthetic assets (Synthetic Assets), including assets that are US stocks (mTSLA, mGOOGL, mAAPL, …).
4. When Launching Mirror Protocol, Do Kwon pointed out that the project will make it easier for global investors to access the US stock market, including US residents of course, and when a U.S. Stock-related products that allow Americans to trade are developed, they must be registered with the SEC.
5. The SEC indicates that they There is no proof that Terraform has registered yet, which is the main reason for this event to occur.
6. In fact, the SEC sent a message to Terraform asking to provide relevant documents for the investigation has taken place since the end of May 2021, but with the event at the Messari Mainnet 2021 has led to the next event – Do Kwon and Terraform filed a lawsuit against the SEC.
Details of the lawsuit you can read here.
7. The reason for the lawsuit brought by Do Kwon is that the SEC misunderstood the nature of Terraform as well as the Decentralized nature of the Mirror protocol, and the SEC has do not keep the investigation of Mirror Protocol a secret (for subpoenaing the public at a major event), this violates a law issued by the SEC itself.
Response from Do Kwon & Terraform Labs
8. First, there is a detail that is why the SEC subpoenaed Do Kwon and Terraform Labs and not Mirror Protocol – the main character leading to this event, it is because the SEC believes that Terraform, a company based in Singapore that develops and owns Mirror.
9. However, being a Dapp with decentralized nature should Mirror is not owned by Terraform or Do Kwon which is owned by the community, it is not reasonable for the SEC to subpoena Do Kwon or Terraform Labs (Theo Do Kwon).
10. From my personal perspective, the SEC targets Do Kwon because Mirror Protocol cannot be sued because the protocol’s “community” is completely anonymous, and Terraform Labs, a Singapore-based company, is the SEC’s sole choice.
11. Moreover, the SEC’s failure to keep the investigation secret violated the very law set out by the SEC that was the main basis for Do Kwon to file a lawsuit against the SEC.
12. If this lawsuit is successful then in the future SEC will not be able to reinvestigate Mirror Protocol – an action considered by many legal experts to “preempt” the SEC’s upcoming moves with Terraform Labs.
Direction for Terra . ecosystem
13. When the news about this event was posted, according to my observations, the price of LUNA and MIR did not have a big fluctuation, showing that this news does not seem to have much impact on Mirror Protocol as well as Terra’s ecosystem.
14. However, it is also important to consider the risk that Do Kwon loses the case and the SEC may force Mirror Protocol to stop offering US equities synthetic asset products.
15. Currently, Mirror is still one of the 4 protocols with the largest TVL In the Terra ecosystem, although it is losing market share, losing Mirror will still be a huge loss for the ecosystem.
16. At the time of writing, Mirror’s TVL is $1.6B, of which synthetic assets have a market capitalization of around $430M, it’s worth noting that most of the high-cap synthetic assets are stocks. US stocks, while mETH and mBTC are relatively low-cap.
17. Moreover, among the assets with the largest trading volume on the platform, there are many assets that are stocks.
18. Therefore, if the above risk occurs, it will cause quite a lot of damage to the Terra ecosystem, when the main products of a protocol with the top TVL in the system are required to stop working.
19. This reminds us of the event of “stock token” products of Binance stopped trading due to legal issues in July 2021.
20. However, the development of other DeFi protocols has made the importance of Mirror in the ecosystem decrease (TVL market share is decreasing), hence the loss of a protocol like Mirror (if worst case scenario). ) I think will only affects the Terra ecosystem in the short term.
21. In addition, there is another risk that can be mentioned that the legal authorities will investigate the UST – Stablecoins created from the Mint/burn LUNA mechanism in the context of Stablecoins like USDT or USDC facing a lot of problems. many obstacles from the US government.
22. However, USDT or USDC is investigated due to suspicions of not having enough assets to guarantee the value of $1, as well as being quite related to the traditional financial market, so with UST – a Decentralized Algorithm Stablecoin this risk is very unlikely.
Will Terraform Labs and Do Kwon have a chance to win?
Although I have no legal expertise, I will also analyze and make predictions with this event based on some historical data.
23. The most recent notable legal hurdles of a DeFi protocol can be mentioned Uniswap, when the platform is required to remove 100 tokens from the interface, especially notice that there are Tokenized stocks (synthetic assets are shares) of Synthetix or Mirror Protocol.
24. In this case, the requests from the authorities only work with Uniswap Interface, owned (Centralized) by Uniswap Labs (headquartered in New York), but not with Uniswap Protocol ⇒ Delist in terms of form, and these tokens can still be traded through On-chain, Wallet, other Interface, etc.
25. Thus, even though there is a company in New York, the Founder is not anonymous, but the legal authorities still cannot make a big impact on the Uniswap protocol; However, another question that will be raised is Why are we not seeing Tokenized Stocks being traded on Synthetix?, was there SEC intervention?
26. The answer is no, Synthetix only temporarily does not support trading these synths due to low trading volume and will re-listing in the future.
27. If you pay attention to the timeline, you can see that the Uniswap “delist” 100 tokens event (including the tokenized stocks of Synthetix) took place in July 2021, Synthetix temporarily does not support tokenized stock on foundation takes place in September 2021, so it can be seen that the government cannot influence Synthetix.
28. Another point you need to pay attention to is that the Founder of Synthetix is Kain Warwick, also not anonymous and the SEC can not intervene in this case.
29. In summary, based on the two case studies above, it can be concluded that the SEC can only legally pressure Do Kwon and Terraform Labs, not it is hard to force Mirror Protocol to delist tokenized stocks on the platform, since the ownership of the platform belongs to a completely anonymous and decentralized community.
30. Moreover, Do Kwon also has arguments and grounds to win this lawsuit, and if the worst case happens, then I think the platform will only “delist” the tokenized stocks in the form of form like Uniswap, and developers will also build other interfaces so that users can transact normally ⇒ Absolutely no big impact on Mirror and Terra ecosystem.
Thus, through this case study, you can see that DeFi is still firmly asserting its “decentralization” despite many interventions from lawmakers.
I hope, the article has helped you have a more perspective on Do Kwon’s lawsuit with the SEC in particular and the legal issues in the DeFi market in general. What do you guys think about this event? Please comment below to discuss with CHK!
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