Judge Approves Terraform Labs’ $4.5 Billion Settlement with SEC, Leading to Firm’s Dissolution

Terraform Labs, the entity behind the infamous TerraUSD (UST) stablecoin collapse, has announced its dissolution following a substantial settlement with the U.S. Securities and Exchange Commission (SEC). This decision marks the end of an era for the company, which has been at the center of one of the most significant controversies in the cryptocurrency industry.

On June 13, New York District Court Judge Jed Rakoff approved the $4.5 billion settlement between Terraform Labs, its co-founder Do Kwon, and the SEC. The agreement requires Terraform to pay $3.6 billion in disgorgement, $420 million in civil penalties, and $467 million in prejudgment interest. Additionally, Kwon is to pay $110 million in disgorgement, $14.3 million in prejudgment interest, and an $80 million civil penalty. This settlement effectively bans Terraform and Kwon from participating in the crypto industry.

The collapse of Terraform Labs’ ecosystem in May 2022 was triggered when its algorithmic stablecoin, TerraUSD, lost its peg to the U.S. dollar. This event led to a catastrophic drop in the value of its Terra Classic (LUNC) token, wiping out $45 billion from the Terra blockchain and causing a ripple effect throughout the crypto market. The SEC charged Terraform and Kwon in February 2023 with securities laws violations and fraud, stating that their activities resulted in devastating losses for investors.

Chris Amani, the current CEO of Terraform Labs, announced the firm’s intention to cease operations entirely. Amani, who took over from Kwon in July 2023, acknowledged that while the company was positioned to accelerate its projects had they won the trial, the loss necessitated a complete shutdown. Consequently, Terraform Labs plans to sell key projects within its ecosystem, including Pulsar Finance, Station Wallet, and Enterprise Protocol.

The community will now take control of the Terra blockchain. Amani highlighted plans for a community proposal to burn remaining vested and unvested tokens, emphasizing the need for community-led governance. This shift has garnered mixed reactions from the community, with some expressing optimism about the new direction, while others remain critical of past leadership.

The SEC settlement with Terraform Labs sets a significant regulatory precedent, underscoring the importance of compliance in the crypto industry. SEC Chair Gary Gensler commented on the case, stating, “The economic realities of a product — not the labels, the spin, or the hype — determine whether it is a security under the securities laws. Terraform and Do Kwon’s fraudulent activities caused devastating losses for investors, in some cases wiping out entire life savings.”

Terraform Labs filed for Chapter 11 bankruptcy in January 2023, and it remains unclear how the company will secure the funds to meet the settlement requirements, given its reported assets of $430.1 million against liabilities of $450.9 million. The settlement also includes a prohibition on Kwon serving as an officer or director of any public company.

Do Kwon is currently in custody in Montenegro after being arrested for using fake passports in an attempt to leave the country. He is awaiting a decision on extradition requests from both the U.S. and South Korea, where he faces criminal charges.

The dissolution of Terraform Labs and its settlement with the SEC serve as a cautionary tale for the cryptocurrency industry, highlighting the critical need for transparency, regulatory compliance, and robust governance. As the industry continues to evolve, the lessons from Terraform Labs’ downfall will likely shape future regulatory approaches and industry practices.