Terraform Labs and its CEO, Do Kwon, are close to settling a fraud case with the U.S. Securities and Exchange Commission.
During a telephone conference with Judge Jed Rakoff on May 29, lawyers for both parties disclosed that they had reached an agreement in principle.
The last brushstrokes
The final terms of the settlement are expected to be submitted for court approval by June 12, 2024.
The SEC’s case against Terraform Labs and Kwon came from allegations that they misled investors about the stability and investment potential of their crypto tokens, particularly the algorithmic stablecoin TerraUSD, the UST and other Terra-related tokens.
In February, both Terraform Labs and Kwon were found liable for defrauding investors, after the SEC accused them of offering crypto assets without proper registration and making false claims about the assets’ stability and potential returns.
How to decimate the market?
The collapse of Terraform Labs in May 2022 had an unprecedented negative impact on the cryptocurrency market, leading to what is often referred to as the crypto winter.
This downturn affected numerous crypto firms and investors, started a bankruptcy wave, severely damaging the industry’s reputation.
The Terra ecosystem’s failure raised serious doubts about the viability of algorithm-based stablecoins, with many in the industry questioning their future.
As part of the settlement, the SEC is seeking roughly $5.3 billion in disgorgement, prejudgment interest, and civil penalties.
In contrast, Terraform Labs has proposed a much lower penalty of $1 million, arguing against disgorgement, especially for affiliated entities not directly named in the SEC’s case, such as the Luna Foundation Guard.
Next to this, the SEC has suggested banning Kwon from serving as an officer or director in any securities-issuing entity in the future and has demanded full disclosure of his financial accounts and assets.
Of course Kwon has resisted this demand, citing his Fifth Amendment rights against self-incrimination.
Not a law abiding citizen
Kwon’s legal troubles extend beyond the SEC case. In March 2023, he was arrested for falsifying travel documents, using a fake passport while tried to leave Montenegro, where he also faces potential charges. He was later released on bail, but the U.S. is want his extradition.
This settlement is significant because it highlight the regulatory scrutiny and legal challenges facing the cryptocurrency industry, particularly in the wake of high-profile collapses like that of Terraform Labs.
The outcome of this case could influence the regulatory attitude and investor confidence (or the lack of it) in algorithmic stablecoins and other crypto assets.
Many experts think if the settlement terms are approved, it could also set a precedent for how similar cases are handled in the future, potentially leading to stricter regulations and oversight of the crypto market.
