The United States Securities and Exchange Commission (SEC) has secured a $4.47 billion civil settlement with the now-bankrupt cryptocurrency firm Terraform Labs, marking a significant development in the aftermath of one of the most catastrophic collapses in the crypto industry’s history. The settlement follows a jury finding Terraform and its founder, Do Kwon, liable for defrauding investors, who collectively lost an estimated $40 billion when the TerraUSD and Luna tokens imploded in 2022.
The proposed final judgment was submitted on Wednesday in Manhattan federal court and now awaits approval from US District Judge Jed Rakoff, who presided over the trial that concluded on April 5th.
As part of the settlement, Terraform Labs is required to pay $4.05 billion in disgorgement plus interest and an additional $420 million in civil penalties. Given the company’s bankruptcy filing in January, much of this amount is expected to be classified as an unsecured claim in Terraform’s ongoing Chapter 11 liquidation process.
The total judgment sum, including penalties against Kwon, amounts to $4.55 billion. Do Kwon himself faces an $80 million civil fine and has agreed to transfer $204.3 million to Terraform’s bankruptcy estate. Additionally, he will be banned from participating in any cryptocurrency transactions.
“Entry of this judgment would ensure the maximal return of funds to harmed investors and put Terraform out of business for good,” the SEC stated in a court filing, emphasizing that the proposed settlement is fair, reasonable, and in the public interest.
Terraform Labs and Do Kwon consented to the judgment, although their legal representatives have yet to provide any public comments. In early April, Kwon was found liable for fraud in a civil case held in Manhattan.
The SEC accused Terraform and Kwon of misleading investors about the stability of TerraUSD, a stablecoin designed to maintain a fixed $1 price. They were also accused of falsely claiming that Terraform’s blockchain technology was integrated into a widely used Korean mobile payment app.
The downfall of TerraUSD and its sister token, Luna, in May 2022 triggered a seismic downturn in the cryptocurrency market. TerraUSD, intended to be a stable digital currency pegged to the US dollar, failed to maintain its value, leading to a massive sell-off and collapse of Luna.
Do Kwon did not attend his trial in the US, as he has been detained in Montenegro since March 2023. Both the US and South Korea are seeking his extradition to face criminal charges. Throughout these proceedings, Kwon has maintained his innocence.
This landmark settlement underscores the SEC’s commitment to holding crypto firms accountable and protecting investors from fraudulent schemes. The resolution of this case, involving one of the most notorious collapses in the crypto world, is expected to have far-reaching implications for the regulation and oversight of digital assets.
As the liquidation process continues, investors and stakeholders will be closely monitoring the disbursement of recovered funds, hoping for some measure of restitution in the wake of the significant financial losses incurred during the TerraUSD and Luna debacle.