A U. S. District Court judge has finalized a hefty settlement between the Securities and Exchange Commission (SEC) and Terraform Labs, the company behind the collapsed Terra blockchain ecosystem, and its co-founder Do Kwon. The agreement, approved by Judge Jed Rakoff of the Southern District of New York on June 13th, resolves the SEC’s civil fraud charges against Terraform and Kwon stemming from the TerraUSD (UST) stablecoin crash in May 2022.
Under the settlement, Terraform Labs and Do Kwon will collectively pay $4. 5 billion. This includes $3. 6 billion in disgorgement, which represents the profits the SEC believes Terraform Labs earned through its unregistered offerings of crypto asset securities. Additionally, the settlement imposes a $420 million civil penalty on Terraform Labs and an $80 million penalty on Kwon. Both parties will also be required to pay prejudgment interest, totaling nearly $467 million for Terraform and $14. 3 million for Kwon.
The settlement comes just two months after a jury in the same New York court found Terraform Labs and Kwon liable for the fraud charges. The SEC’s lawsuit alleged that Terraform misled investors about the stability of UST, a dollar-pegged algorithmic stablecoin, and its sister token Luna Classic (LUNC). The SEC claimed that Terraform made false and misleading statements regarding the peg mechanism and reserve assets backing UST.
The collapse of the Terra ecosystem in May 2022 was a major blow to the cryptocurrency industry. UST lost its peg to the dollar, triggering a death spiral for both UST and LUNC. The event wiped out billions of dollars in investor funds and contributed to a broader crypto market downturn.
The SEC’s enforcement action against Terraform and Do Kwon represents a significant development in the ongoing regulatory debate surrounding cryptocurrencies. The SEC has consistently argued that certain digital assets meet the definition of securities under U. S. law and thus fall under its regulatory purview. This settlement bolsters the SEC’s stance and suggests that it will continue to aggressively pursue enforcement actions against crypto companies it believes are violating securities laws.
The financial penalties imposed on Terraform Labs and Do Kwon are the largest ever levied by the SEC in a crypto enforcement action. The size of the settlement reflects the seriousness of the SEC’s allegations and the devastating impact of the Terra ecosystem collapse.
