- Terraform Labs has settled with the SEC for $4.5 billion, resulting from a fraud involving crypto asset securities that led to massive investor losses.
- Founder Do Kwon and others are permanently banned from the crypto industry, with Terraform’s financial liabilities raising questions about their ability to fulfill the settlement.
Terraform Labs, the infamous company behind the Terra stablecoin collapse, has reached a groundbreaking settlement with the US Securities and Exchange Commission (SEC) for a staggering $4.5 billion. This landmark decision also permanently bars Terraform’s disgraced founder, Do Kwon, and others involved from operating ventures in the crypto industry. A New York judge approved the settlement, marking a significant moment in the regulatory landscape of cryptocurrency.
The High Cost of Fraud
In a press release, the SEC stated, “The Securities and Exchange Commission today announced that Terraform Labs PTE, Ltd. and Do Kwon agreed to pay more than $4.5 billion following a unanimous jury verdict holding them liable for orchestrating a years-long fraud involving crypto asset securities that led to massive investor losses when the scheme unraveled.” This settlement includes $3.6 billion in disgorgement for Terraform, with Kwon personally liable for an additional $110 million. Additionally, Terraform will pay $420 million in civil penalties and $467 million in prejudgment interest, while Kwon will pay $14.3 million in civil penalties and $80 million in prejudgment interest.
Kwon and his team managed the Terra ecosystem, which included an algorithmic stablecoin – TerraUSD (UST). This stablecoin’s price was pegged to the US dollar and balanced by another token, Terra Classic (LUNC), through a mint-and-burn mechanism. This mechanism provided arbitrage opportunities, maintaining UST’s price near the $1 mark. However, in 2022, the algorithmic balance failed, decoupling UST from the dollar and triggering a catastrophic price spiral for LUNC. This collapse erased over $45 billion in value, leaving investors with significant losses.
The SEC’s intervention in February 2023 led to a lawsuit against Terraform Labs and Do Kwon for issuing illegal securities. SEC Chair Gary Gensler emphasized, “This case affirms what court after court has said: The economic realities of a product — not the labels, the spin, or the hype — determine whether it is a security under the securities laws.”
Uncertain Future for Terraform Labs
Despite the settlement, questions remain about how Terraform Labs will fulfill this financial obligation. The company’s disclosed assets are valued at $430.1 million, while its liabilities total $450.9 million. Meanwhile, Do Kwon remains imprisoned in Montenegro after attempting to flee using fake passports and identities. Montenegrin authorities are currently deliberating on extradition, with both the US and South Korea seeking to bring him to justice.
This monumental settlement underscores the SEC’s commitment to enforcing securities laws within the crypto industry and serves as a cautionary tale for other crypto ventures. As the regulatory environment continues to evolve, this case will likely have lasting implications for how cryptocurrencies are managed and regulated in the future.
