n April 2024, a New York jury found Terraform Labs and its CEO Do Kwon liable for civil fraud charges brought by the SEC relating to the implosion of the Terra ecosystem in May 2022. The collapse saw projects within the Terra ecosystem collapse in a matter of days, erasing over $40 billion in value. Kwon, who remains in custody awaiting extradition, did not attend the trial.
On June 6th, 2024, Terraform Labs' current CEO Chris Amani and Kwon reportedly agreed to a settlement with the SEC. The proposed settlement would see Kwon and Terraform pay a combined $4.5 billion, including disgorgement of ill-gotten gains prejudgement interest, and civil penalties. Kwon would be personally liable for over $204 million of this amount.
Largest Ever SEC Penalty
If approved, the $4.5 billion penalty would represent the largest ever levied by the SEC. It surpasses the previous record set by Teva Pharmaceutical in 2019 of $3.1 billion. For context, the SEC had initially proposed a settlement of $5.3 billion, but later reduced its request. Still, the agreed-upon amount far exceeds Terraform's suggestion of a $1 million civil penalty and no financial remedies.
The settlement demonstrates the SEC taking a strong stance against brazen misconduct. As their letter to the judge states, it aims to deter not only direct wrongdoing but also those who try to avoid securities laws through questionable frameworks. For the dynamically evolving crypto space, in particular, it sends a message that older investor protection regulations still apply.
Permanent Industry Ban
In addition to the colossal financial penalties, the proposed settlement would permanently ban Kwon and Terraform Labs from interacting with crypto securities. This includes an outright prohibition on acquiring, purchasing, trading, soliciting investors for, or otherwise dealing in such assets.
The ban covers all tokens within the former Terra ecosystem such as LUNA and TerraUSD. It aims to prevent both individuals from restarting similar projects or activities in the future. For Kwon, whose career was intertwined with Terra, it represents a lifetime removal from the crypto industry should the judge approve.
Awaiting Final Judgment
With both parties agreeing to the terms, the settlement now requires approval from Judge Jed Rakoff of the Southern District of New York court. He will review the case details and decide whether the proposed judgment is suitable and justified.
Industry observers will be watching closely. If approved, it will establish a powerful example in what is expected to be a landmark case that influences future SEC approaches to investor protection in crypto. The judgment could come in the following months as the court proceeds with assessing the proposed resolution of the matter.
Proper Oversight is Needed
While innovation should be encouraged, the crypto sector can only operate with appropriate guardrails. As digital assets grow in usage and popularity, especially as an investment class, transparency and accountability become increasingly important to mainstream adoption.
The Terra collapse exposed regulatory gaps but also the need for leadership that prioritises responsibility. If the settlement is accepted, it would help assure the public that major misconduct has serious consequences, while still allowing the industry to progress. With diligent oversight and governance, cryptocurrency can continue development in a compliant manner.
