Terraform Labs and Do Kwon to Pay $4.5 Billion in Landmark SEC Settlement
In a landmark settlement that underscores the growing regulatory scrutiny of the crypto industry, Singapore-based Terraform Labs and its founder Do Kwon have agreed to pay $4.5 billion to the U.S. Securities and Exchange Commission (SEC).
This resolution comes after a jury found them liable for fraud involving crypto asset securities that were not registered, leading to substantial investor losses when the TerraUSD stablecoin collapsed in 2022.
The Collapse of TerraUSD and the Ensuing Legal Battle
Terraform Labs, under Kwon’s leadership, developed TerraUSD (UST), a stablecoin designed to maintain a 1:1 peg with the U.S. dollar. However, in 2022, UST lost its peg, triggering a catastrophic collapse that wiped out $40 billion in market value and devastated countless investors.
Fallen crypto tycoon Do Kwon’s Terraform Labs agreed to one of the largest penalties ever to settle a civil securities-fraud lawsuit, consenting to pay the SEC just under $4.5 billion. https://t.co/Frwvqqqsei via @WSJ.
Is $4.5B the highest ever fine slapped by SEC?— Ketharaman Swaminathan (@s_ketharaman) June 14, 2024
The SEC alleged that Terraform and Kwon misled investors about the stability and utility of UST and other crypto asset securities offered through the Terraform ecosystem. Following a nine-day trial, a jury found the defendants liable for securities fraud.
The Terms of the Settlement
The settlement requires Terraform Labs to pay $3.6 billion in disgorgement, $466 million in prejudgment interest, and a $420 million civil penalty. Kwon, individually, will pay $110 million in disgorgement, $14.3 million in prejudgment interest, and an $80 million civil penalty.
TERRA COLLAPSE: THE OFFICIAL END OF TERRAFORM LABS
– Terraform Labs CEO Chris Amani announced the company will wind down operations following a $4.5 billion settlement with the SEC, stemming from the collapse of $LUNA and $UST in 2022.
– The settlement requires Terraform Labs… pic.twitter.com/JsJMXMbHBO
— BSCN (@BSCNews) June 13, 2024
Moreover, Terraform Labs has agreed to wind down its operations and distribute its remaining assets to affected investors. The settlement also effectively bars Terraform and Kwon from participating in future securities offerings, underscoring the SEC’s commitment to protecting investors and maintaining market integrity.
SEC’s Stance on Crypto Regulation
SEC Chair Gary Gensler emphasized the significance of this settlement, stating that “the economic realities of a product — not the labels, the spin, or the hype — determine whether it is a security under the securities laws.”
This statement reinforces the SEC’s position that crypto assets, even those branded as stablecoins, may be subject to securities regulations if they meet the criteria of an investment contract.
The Terraform Labs case serves as a stark reminder of the risks associated with crypto investments and the importance of regulatory oversight in the evolving digital asset landscape.
As the crypto industry continues to mature, investors can expect increased scrutiny and enforcement actions from regulators like the SEC, aiming to protect investors and ensure fair and transparent markets.
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