Terraform Labs, the company responsible for the collapse of the Terra stablecoin, has reached a settlement with the US Securities and Exchange Commission (SEC) for $4.5 billion. This settlement comes after a unanimous jury verdict found Terraform Labs and its founder, Do Kwon, liable for orchestrating a fraudulent scheme involving crypto asset securities that resulted in significant investor losses.
According to the SEC press release, Terraform will pay $3.6 billion in disgorgement, with Kwon personally responsible for an additional $110 million. In addition, Terraform will pay $420 million in civil penalties and $467 million in prejudgment interest. Kwon will also face civil penalties and prejudgment interest totaling $14.3 million and $80 million, respectively.
Terraform Labs operated the Terra ecosystem, offering the algorithmic stablecoin TerraUSD (UST) pegged to the US dollar. The ecosystem also included another token, Terra Classic (LUNA), which helped maintain the balance of UST prices. However, in 2022, the algorithmic balance between these assets shifted, causing UST’s value to decouple from the dollar and leading to a sharp decline in LUNA prices.
The collapse of the Terra stablecoin wiped out over $45 billion in ecosystem value, leaving investors in a precarious position. The SEC intervened in February 2023, filing a lawsuit against Terraform Labs and Do Kwon for issuing illegal securities. SEC Chair Gary Gensler emphasized the importance of considering the economic realities of a product to determine its classification under securities laws.
As Terraform Labs faces the daunting task of settling the $4.5 billion with disclosed assets of $430.1 million and liabilities of $450.9 million, Do Kwon remains in prison in Montenegro. Authorities in Montenegro are deliberating on the extradition destination for Kwon, as both the US and South Korea have issued criminal charges against him.
The settlement between Terraform Labs and the SEC marks a significant development in the aftermath of the Terra stablecoin collapse. Investors and industry observers will be closely monitoring the company’s next steps as it navigates the financial implications of the settlement and addresses the regulatory challenges ahead.