Terraform Labs and its co-founder Do Kwon have reached a significant settlement with the U.S. Securities and Exchange Commission (SEC), agreeing to pay $4.5 billion to resolve allegations of investor fraud related to their TerraUSD (UST) stablecoin and Luna token.
Background of the Case
In May 2022, the SEC launched a civil lawsuit against Terraform Labs and Do Kwon, accusing them of defrauding investors by misrepresenting the stability and security of their UST stablecoin and Luna token. Initially, the SEC sought a total of $5.3 billion, which included disgorgement, prejudgment interest, and civil penalties. The allegations came after a dramatic collapse of the Terra ecosystem, which caused substantial financial losses and shook the cryptocurrency market.
The Collapse of Terra Ecosystem
The downfall of Terra’s ecosystem began when UST, an algorithmic stablecoin designed to maintain parity with the US dollar, lost its peg. This devaluation set off a chain reaction, drastically reducing the value of Luna, Terra’s utility token, to nearly zero. The collapse wiped out billions of dollars, severely impacting investors and triggering a prolonged downturn in the broader cryptocurrency market.
Also Read: The Fall Of UST LUNA: Crypto’s Greatest Crash!
Settlement Details and Future Implications
Under the settlement, Terraform Labs will pay $4.05 billion, covering disgorgement, prejudgment interest, and a civil penalty. Do Kwon, on the other hand, will personally pay an $80 million civil penalty. Furthermore, both Terraform Labs and Do Kwon are permanently banned from participating in the offering or sale of crypto asset securities.
The settlement’s approval is pending judicial review. Terraform Labs’ recent bankruptcy filing in January 2024 has raised questions about their capacity to meet the financial terms of the settlement. Meanwhile, Do Kwon is also facing separate criminal charges related to the Terra collapse and is awaiting extradition from Montenegro.