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Crypto founder Do Kwon explains why he's suing the SEC

The crypto founder going on the offensive in the industry's latest battle with the Securities and Exchange Commission (SEC) called out a lack of understanding as a big problem among regulators.

Terraform Labs co-founder and CEO Do Kwon, who sued the SEC Friday to quash a recent subpoena, explained to Yahoo Finance at Monday's All Markets Summit that regulators are still learning that some of the code and protocols launched in the sector are no longer controlled by centralized entities, but rather communities.

Declining to comment on the specifics of his latest lawsuit against the SEC, Kwon pointed to the reality of of how new technology is changing how companies like his quickly cede control of projects that are run by token holders.

"I think more broadly there is just an explosion of a lot of different projects that are coming into the crypto industry and usually when there is explosion of a new industry — some of which may not fit in nicely with existing regulatory or incumbent networks — I think that causes a bit of conflict and friction," Kwon said. "Through this dialogue and exchange you generally end up with frameworks that are a little bit more accepting of innovation and change, and we're happy to be part of that dialogue insofar as proper procedures are adhered to."

At issue in Kwon's case were legal disputes over the way he was served at a major crypto conference last month and whether the SEC violated its own rules by targeting Kwon, a South Korean native, after he voluntarily answered questions about the services Terra enables. As the lawsuit documents, the SEC had been inquiring about Terra's Mirror Protocol, which enables trading of "synthetic" assets that mirror real world assets, like stocks.

As the lawsuit further details, the SEC asked for documents that Terraform Labs said would be impossible to provide or unrealistic in scope. Kwon, who likened himself to a toymaker, says Terraform Labs doesn't function like a normal hands-on company after conceiving of products.

"We are creators of these products and once we create them we hand them off to the community, including the entire ownership of the protocols, and I think that takes some time and getting used to," he said. "Regardless of what regulators think of the issue, there’s no change I can make to the Mirror Protocol. So when we say that Mirror is decentralized, it is fully decentralized. There is nothing that the creator can do to sort of cap the growth of the protocol."

Of course, the process of "shutting down" projects in today's decentralized finance age looks incredibly different from just a few years ago. Kwon admitted that while regulators in the past have been able to control centralized points, like websites or apps on app stores, a community like Terra's with more than 3 million accounts was built to be decentralized by nature. For Mirror specifically, Kwon said Terra did not pre-mine any tokens for any financial windfall, doesn't control any of the operating keys that would be able to shut it down, and only operates one front end among dozens that customers use to interact with to trade synthetic assets.

The SEC did not immediately respond to Yahoo Finance for comment. For her part, SEC Commissioner Hester Peirce has previously weighed in on the unique challenges the agency faces in trying to regulate decentralized entities. Speaking to Yahoo Finance earlier in October, she warned investors that some projects might be overstating just how decentralized they actually are.

"The decentralized world is one that is very new to us because we are used to dealing with large — usually large, centralized intermediaries. So true decentralized projects do pose a challenge," Peirce said. "I think what I would caution people to be aware of is that sometimes something claims to be decentralized and isn't, and there is actually a centralized entity. And I think certainly regulators will be looking to that centralized entity."

Luna, the cryptocurrency powering the Terra ecosystem and its algorithmically backed stablecoin UST, has surged more than 6,000% on the year.

You can watch Do Kwon's full interview at Yahoo Finance's All Markets Summit here.

Zack Guzman is an anchor for Yahoo Finance Live as well as a senior writer covering crypto, cannabis, startups, and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.

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