Terra’s $4.5 Billion Fine: A Warning Shot to Crypto Fraudsters

• Judge Rakoff approves $4.5B settlement between SEC, Terraform Labs, and Do Kwon.
• Settlement bans Kwon and Terraform from trading crypto asset securities.
• Terra ecosystem collapse led to $40 billion in investor losses and market instability.

In a decisive move against fraud in the cryptocurrency sector, a federal judge has approved a $4.5 billion settlement between the Securities and Exchange Commission and Terraform Labs, along with its former CEO, Do Kwon, stemming from the company’s 2022 collapse and subsequent market turmoil.

U.S. District Court Judge Jed Rakoff has approved the $4.5 billion settlement. The agreement resolves an ongoing case that followed the collapse of the Terra ecosystem in May 2022. 

Announced on June 14, 2024, the settlement includes a comprehensive ban prohibiting Kwon and Terraform Labs from buying and selling “crypto asset securities.” Additionally, Terraform Labs and Kwon must pay a combined $4.5 billion in disgorgement, prejudgment interest, and civil penalties. This resolution follows a New York jury’s civil liability verdict against Terraform Labs and Kwon for fraud just two months earlier.

The Terra ecosystem’s collapse had a domino effect on the broader cryptocurrency market, leading to the downfall of notable entities like the crypto hedge fund Three Arrows Capital and impacting other firms like Genesis Global Capital and FTX. The resulting damage prompted the SEC to take serious action against Terraform Labs and its leadership.

SEC Chair Gary Gensler highlighted the significance of the case in a press release, stating:

 “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. Terraform and Do Kwon’s fraudulent activities caused devastating losses for investors, in some cases wiping out entire life savings.”

The settlement amount was a subject of negotiation. The SEC initially proposed $5.3 billion, while Terraform Labs’ legal team argued for a reduced penalty of no more than $1 million. Eventually, both parties agreed on the $4.5 billion figure on June 6.

Do Kwon, currently in custody in Montenegro awaiting extradition, did not attend the trial. Meanwhile, Terraform Labs is navigating Chapter 11 bankruptcy protection, with CEO Chris Amani testifying that the company has approximately $150 million in assets. The method of payment for the substantial fines remains unclear.

This settlement represents a significant victory for the SEC and a stern warning to the crypto industry about the severe repercussions of fraudulent activities. The decision aims to provide some restitution to the victims of the Terra ecosystem’s collapse and underscores the importance of regulatory compliance in the rapidly evolving crypto market.