A settlement agreement involving a $4.5 billion penalty and a ban on trading “crypto asset securities” has been approved by a U.S. District Court judge. The agreement was reached between the Securities and Exchange Commission (SEC), Terraform Labs, and its former CEO, Do Kwon. This decision comes after Terraform Labs and Kwon were found civilly liable for fraud related to the collapse of the Terra ecosystem in May 2022.
The settlement requires Terraform Labs and Kwon to pay a combined $4.5 billion in disgorgement and civil penalties. Additionally, they are permanently banned from buying and selling all “crypto asset securities,” including Terra ecosystem tokens. The collapse of the Terra ecosystem had a ripple effect, leading to the downfall of crypto hedge fund Three Arrows Capital, as well as other crypto companies like Genesis Global Capital and FTX.
SEC Chair Gary Gensler emphasized that the economic realities of a product determine whether it is considered a security under the securities laws. The fraudulent activities of Terraform and Kwon resulted in significant losses for investors, some of whom lost their entire life savings. Gensler highlighted that when firms fail to comply with the law, investors are the ones who suffer. Despite Terraform and Kwon’s resistance to the SEC’s investigation, the settlement now provides some justice for the victims of their fraud.
Initially, the SEC proposed a $5.3 billion settlement, which Terraform Labs’ lawyers opposed, arguing for a lower fine. Eventually, both Kwon and Terraform Labs agreed to the SEC’s revised settlement offer of $4.5 billion. Kwon, who is currently in custody in Montenegro awaiting extradition, did not attend the trial where the settlement was reached.
Terraform Labs, currently under Chapter 11 bankruptcy protection, is facing the challenge of paying the substantial fines with approximately $150 million in assets. The terms of the settlement are final and cannot be appealed.
In a statement released by the SEC, they reaffirmed their commitment to holding accountable those who engage in fraudulent activities in the crypto industry. The settlement marks a significant step towards addressing the repercussions of the collapse of the Terra ecosystem and providing restitution to affected investors.
As the case unfolds, it highlights the importance of regulatory compliance in the cryptocurrency sector and the severe consequences that can result from fraudulent behavior. The outcome of this settlement serves as a cautionary tale for companies and individuals operating in the crypto space, underscoring the need for transparency, accountability, and adherence to legal standards to protect investors and maintain the integrity of the industry.