Cryptocurrency developer caught up in market crackdown sues SEC

A cryptocurrency developer who was handed two subpoenas as he walked inside a hotel last month won’t comply with the demands — and is instead suing the federal regulator that issued them.

Do Kwon, a South Korean citizen and resident, says the move by the Securities and Exchange Commission violated the agency’s rules and was designed either to embarrass him or to stir up media interest in its crackdown on the cryptocurrency market.

Kwon and his company have sued the SEC over the episode and want a federal judge to quash the subpoenas. The subpoenas were hand-delivered to Kwon as he stepped off an escalator in a New York hotel where he was scheduled to speak at a crypto conference, according to his lawsuit.

The incident caused a stir at the Mainnet 2021 event and provided fuel for articles on numerous crypto-media websites. The in-person subpoena issuance violated the SEC’s own rules for keeping its probes secret, Kwon’s lawsuit alleges.

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An SEC spokeswoman declined to comment. An attorney for Kwon didn’t immediately return messages seeking comment.

The SEC under Chairman Gary Gensler has taken a strict stance on the cryptocurrency market, which mostly exists outside of federal regulation. Gensler has questioned whether many coin issuers and exchanges are flouting investor-protection rules.

SEC lawyers first emailed Kwon about their investigation in May, seeking his voluntary cooperation, according to the complaint. Regulators interviewed him over video in July and, by September, told his lawyers that they believed an enforcement action was warranted, the complaint says.

But taking formal action was complicated because the US agency lacks clear jurisdiction over Kwon and his company, Terraform Labs, which is based in Singapore, according to the lawsuit. Handing the subpoenas to Kwon in person was “intended to impermissibly secure personal jurisdiction over Kwon” and Terraform, the filing says.

Serving Kwon while he was in the US also could make it easier for the SEC to obtain evidence from him without having to work through overseas regulators, said Ashley Ebersole, a partner at Bryan Cave Leighton Paisner LLP who previously worked at the SEC.

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“The [conference] context is unusual, but I wouldn’t necessarily read anything into this beyond the certain time and certain date and knowing the person is going to be there,” he said.

Terraform builds software programs designed to facilitate the use and creation of cryptocurrencies and other digital assets.

The SEC has been investigating a particular application that Terraform developed, known as the Mirror protocol, according to Kwon’s complaint. Mirror allows traders to create new digital assets that track the prices of stocks and exchange-traded funds.

Regulators have in the past warned that such assets look like derivatives, which in the US typically must be traded on regulated markets overseen by agencies such as the SEC. Platforms selling crypto derivatives typically try to follow US law by forbidding American traders from accessing their programs.

Kwon’s lawsuit doesn’t explain the theory of the SEC’s investigation or what laws Terraform may have violated. It asks for a judge to nix the subpoenas and order the SEC to pay Terraform’s attorney fees associated with the lawsuit.

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News of the subpoenas spread quickly on social media websites last month, after Slava Rubin, an investor attending the conference, wrote on Twitter: “lol I just witnessed a guy get served by the SEC at the top of the escalator at #mainnet2021 right before going on stage for his panel.”

The tweet sparked an outcry from the conference’s organizer, who complained that regulators invaded the event to serve a subpoena on a participant. When another Twitter user congratulated Rubin for reporting the incident, he replied: “Thank you. Just on the right escalator at the right time.”

Write to Dave Michaels at dave.michaels@wsj.com

This article was published by Dow Jones Newswires

This news is republished from another source. You can check the original article here.

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