Terraform Labs and its former CEO, Do Kwon, have reached a monumental settlement with the U.S. Securities and Exchange Commission (SEC), agreeing to pay a staggering $4.5 billion in disgorgement, prejudgment interest, and civil penalties. This settlement marks a significant development in the ongoing legal saga following the $40 billion collapse of the Terra ecosystem in May 2022.
The Settlement Agreement
The agreement, filed on Wednesday, is a major step towards resolving the SEC’s civil fraud charges against Terraform Labs and Kwon. The settlement still needs the approval of U.S. District Court Judge Jed Rakoff of the Southern District of New York to become binding. If approved, it will also permanently ban Kwon and Terraform Labs from buying and selling crypto asset securities, including all tokens within the Terra ecosystem.
Legal and Financial Repercussions
This settlement is not just about financial penalties. It carries significant legal implications as well. Kwon, who is currently detained in Montenegro awaiting a decision on his extradition to either the U.S. or South Korea to face criminal charges, was not present during the trial. Despite his absence, the New York jury found both him and Terraform Labs liable for the charges brought by the SEC.
In April, Terraform Labs, under the leadership of its current CEO Chris Amani, was found liable for civil fraud. The collapse of the Terra ecosystem had a catastrophic impact on the crypto market, leading to extensive financial losses for investors. The SEC’s proposed settlement aims to send a clear message to the crypto industry about the importance of adhering to federal securities laws.
Breakdown of the Penalties
Out of the total $4.5 billion penalty, Kwon is personally responsible for at least $204 million. This is a significant increase from the $1 million civil penalty initially proposed by Terraform Labs in their April memorandum of opposition to the SEC’s motion for final judgment. The SEC’s initial settlement offer was even higher at $5.3 billion. Despite the substantial reduction, the final amount is still a hefty financial blow to both Kwon and Terraform Labs.
SEC’s Stance about the Issue
The SEC’s legal team has urged Judge Rakoff to approve the settlement, emphasizing its potential as a deterrent. They believe the judgment will serve as a warning to others in the crypto industry who might attempt to circumvent federal securities laws. “If approved, the proposed judgment will send an unmistakable deterrent message to not only those who engage in brazen misconduct, but also to all those who seek to evade the requirements of the federal securities laws by crafting new standards of behavior for crypto assets that fall under the purview of the federal securities laws,” the lawyers wrote in their letter to the court.
What will be the Future of Terraform Labs
The future of Terraform Labs remains uncertain. A representative for the company declined to comment on the proposed settlement or its implications for their operations moving forward. Currently, the company is under Chapter 11 bankruptcy protection with approximately $150 million in remaining assets, according to Amani’s testimony during the trial.
Conclusion
The $4.5 billion settlement between the SEC and Terraform Labs, along with its former CEO Do Kwon, represents one of the most significant penalties in the history of cryptocurrency regulation. It highlights the increasing scrutiny and regulatory pressure faced by the crypto industry. As this case moves forward, it will undoubtedly have far-reaching implications for how crypto firms operate and comply with federal securities laws.
