Terraform Labs Reaches $4.47 Billion Settlement with SEC Over Crypto Fraud

Terraform Labs has reached a $4.47 billion civil settlement with the U.S. Securities and Exchange Commission (SEC) following a jury’s finding that the company defrauded cryptocurrency investors. This landmark case comes in the wake of the catastrophic collapse of the TerraUSD and Luna tokens in 2022, which resulted in investors losing an estimated $40 billion and precipitated a widespread downturn across the entire crypto industry.

The proposed final judgment, which covers Terraform and its founder Do Kwon, was filed on Wednesday in Manhattan federal court. The judgment now awaits approval from U.S. District Judge Jed Rakoff, who presided over the trial that concluded on April 5.

The settlement includes $4.05 billion in disgorgement plus interest and a $420 million civil fine against Terraform. However, due to Terraform’s bankruptcy filing in January, the vast majority of this sum is unlikely to be paid. Instead, it will be treated as an unsecured claim in Terraform’s ongoing Chapter 11 liquidation process. Additionally, the judgment imposes an $80 million civil fine on Do Kwon, who has also agreed to be banned from engaging in crypto transactions and to transfer $204.3 million to Terraform’s bankruptcy estate.

“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. “Thus, this proposed judgment is fair, reasonable, and in the public interest.”

Terraform Labs and Do Kwon consented to the judgment, and their lawyers have not yet responded to requests for comment. The civil case against Kwon, which concluded in April, held him liable for fraud.

The SEC’s accusations against Terraform and Kwon included allegations of misleading investors about the stability of TerraUSD, which was designed to maintain a constant $1 price, and falsely claiming that Terraform’s blockchain was used in a popular Korean mobile payment app. The collapse of TerraUSD and its closely linked token, Luna, in May 2022 when TerraUSD failed to maintain its dollar peg, led to significant financial losses for investors.

Kwon did not attend the trial, having been detained in Montenegro since March 2023, with both the U.S. and South Korea seeking his extradition to face criminal charges. He has consistently denied any wrongdoing.

This settlement marks a critical moment for the cryptocurrency sector, highlighting the increasing scrutiny and regulatory actions facing digital asset companies and their executives.

James Cullen
Digital Assets Desk