Terraform Labs, the infamous company behind the Terra stablecoin collapse, has agreed to settle with the US Securities and Exchange Commission for $4.5 billion. Simultaneously, Do Kwon, Terraform’s disgraced founder, and others involved will be banned from ever operating ventures in the crypto industry. A New York judge approved this settlement.
A press release issued by the SEC read, “The Securities and Exchange Commission today announced that Terraform Labs PTE, Ltd. and Do Kwon agreed to pay more than $4.5 billion following a unanimous jury verdict holding them liable for orchestrating a years-long fraud involving crypto asset securities that led to massive investor losses when the scheme unraveled.”
Terraform will pay $3.6 billion in disgorgement, with Kwon personally liable in disgorgement for an additional $110 million. Terraform will also pay $420 million in civil penalty and $467 million in prejudgement interest. Kwon will also bear civil penalty and prejudgement interest and pay $14.3 million and $80 million, respectively.
Kwon and his team operated the Terra ecosystem and offered an algorithmic stablecoin – TerraUSD (UST). Its price was pegged to the US dollar, balanced by another token in the ecosystem – Terra Classic (LUNC). An algorithm utilized a mint-and-burn mechanism, providing arbitrage opportunities that allowed participants to keep UST prices at or very close to the $1 mark. However, the algorithmic balance between the assets flipped in 2022, decoupling UST’s value from the dollar and sending LUNC prices in a death spiral.
This incident erased over $45 billion worth of value from the ecosystem into thin air in no time, leaving investors holding their hats. The SEC intervened in February 2023 and sued Terraform Labs and Do Kwon for issuing illegal securities. “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,” stated Gary Gensler, Chair of the SEC.
It is unclear how Terraform Labs will settle this amount. Its disclosed assets are worth $430.1 million, and liabilities stand at $450.9 million. Kwon remains in prison in Montenegro after being caught trying to evade the country with fake passports and identities. Montenegrin officials are deliberating on which country to extradite him to – both the US and Kwon’s home country, South Korea, have issued criminal charges against him.
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