Terraform Labs and Do Kwon Reach Settlement with SEC in Major Fraud Case

In a significant development within the cryptocurrency sector, Terraform Labs and its former CEO, Do Kwon, have agreed to a tentative settlement with the United States Securities and Exchange Commission (SEC). This settlement follows accusations of fraud linked to the dramatic collapse of Terraform’s stablecoin TerraUSD (UST) and the LUNA cryptocurrency, which triggered a widespread downturn in the crypto market in 2022.

Terraform Labs, based in Singapore, and Do Kwon were embroiled in a legal battle with the SEC over allegations of misleading investors regarding the stability of TerraUSD. The SEC’s lawsuit, filed in February 2023, highlighted that the defendants had falsely assured investors of UST’s stability, which was pegged to the US dollar. Additionally, they were accused of falsely claiming the widespread use of Terraform’s blockchain technology in a popular Korean mobile payment application.

In April 2024, a jury found Terraform Labs and Do Kwon liable for civil fraud, leading to the current settlement discussions. According to court documents, both parties were instructed to finalize and submit the terms of their settlement by June 12, 2024. This agreement was disclosed during a telephone conference held on May 29, 2024, presided over by U.S. District Judge Jed Rakoff.

The SEC initially sought a substantial financial penalty from Kwon and Terraform, including $5.3 billion in disgorgement, prejudgment interest, and civil penalties. Additionally, the regulator proposed banning Kwon from holding any officer or director roles in securities-issuing entities. Terraform Labs countered with a proposal of significantly lower penalties, around $1 million, contesting the SEC’s demands, especially regarding disgorgement from entities not directly implicated in the case, like the Luna Foundation Guard.

Despite these hefty penalties, the final terms of the settlement remain undisclosed. However, the SEC’s push for stringent financial repercussions underscores the regulator’s firm stance on compliance and investor protection within the rapidly evolving crypto landscape.

The downfall of TerraUSD in May 2022 had far-reaching consequences, leading to an estimated $40 billion loss for investors and initiating a prolonged period of instability across cryptocurrency markets, commonly referred to as a “crypto winter.” This event not only caused financial ruin for many investors but also led to increased regulatory scrutiny and numerous legal challenges for entities involved in the crypto ecosystem.

The collapse of TerraUSD and the intertwined LUNA token exposed significant vulnerabilities within the algorithmic stablecoin model, prompting a reevaluation of risk management and transparency standards in the sector.

Beyond the SEC’s civil case, Do Kwon faces multiple criminal charges in the United States and his native South Korea. In the US, he is charged with criminal fraud, while South Korean authorities have accused him of financial crimes, including fraud, bribery, and market manipulation. Kwon’s legal challenges are compounded by an ongoing extradition battle, as both the US and South Korea seek to prosecute him.

Kwon was arrested in Montenegro in March 2023 for attempting to leave the country using falsified travel documents. Although released on bail, he remains in Montenegro awaiting a decision on his extradition. The legal proceedings in Montenegro have seen significant developments, with the Court of Appeal recently referring the case back to the High Court for retrial, following arguments from Kwon’s legal team.