• The SEC proposed a $5.3 billion fine against Terraform Labs and its co-founder, Do Kwon, following their involvement in misleading investors during the 2022 Terra-Luna financial collapse.
• The requested fine includes penalties for spreading misinformation about the safety and utility of their algorithmic stablecoin, Terra USD (UST), which led to substantial market losses.
• If enforced, this fine will surpass the Department of Justice’s $4.3 billion settlement with Binance, setting a new record for the largest crypto-related enforcement action in history.

The United States Securities and Exchange Commission (SEC) is seeking a massive fine against Terraform Labs and its co-founder, Do Kwon, following their recent legal troubles. The commission has proposed a $5.3 billion fine for their involvement in the Terra-Luna collapse of 2022. This fine includes $4.7 billion in disgorgement and prejudgment interest, along with civil penalties amounting to $520 million, divided between Terraform and Kwon.

“The Court should send an unequivocal message that this sort of brazen misconduct, and Defendants’ misbegotten attempt to excuse their behavior by crafting new rules and standards of behavior for crypto markets in contravention of the federal securities laws […] will not be tolerated,” the SEC said in a filing.

On April 19, the SEC filed documents urging the court to enforce these fines after a New York civil court jury found Terraform and Kwon liable on April 5. The verdict concluded that the defendants misled investors about the safety and utility of their algorithmic stablecoin, Terra USD (UST), precipitating extensive financial losses and eroding significant market value.

Following the verdict, SEC Division of Enforcement Director Gurbir S. Grewal highlighted the defendants’ deception, stating:

Terraform Labs and Kwon, its former CEO, deceived investors about the stability of the crypto asset security and so-called algorithmic stablecoin Terra USD […] Through these deceptions, the defendants caused devastating losses for investors and wiped out tens of billions of market value nearly overnight.

He reinforced the importance of regulatory compliance within the crypto sector. According to Grewal, the SEC’s proposed penalties are intended to deter similar future misconduct in the industry.

Countering the SEC’s filing, Terraform has proposed a significantly lower penalty of $3.5 million, contrasting sharply with Kwon’s suggestion of only $800,000. The SEC also seeks to impose additional sanctions on Kwon, including barring him from serving as an officer or director of any security issuer and mandating full disclosure of his banking accounts and assets. A conduct-based injunction against Terraform is also recommended to prevent repeat offenses.

This case stands as potentially the largest crypto-related enforcement action to date, surpassing the Department of Justice’s $4.3 billion settlement with Binance in February 2023. Binance’s charges stemmed from inadequate anti-money laundering controls, whereas Terraform’s current allegations involve direct violations of securities laws.

Besides Terra and Kwon, the SEC is also pursuing another securities lawsuit against Ripple, a blockchain payments firm. As of the latest ruling, the SEC is demanding a fine of $2 billion for selling XRP to institutional investors, which the commission deems as unregistered securities.  However, an earlier ruling by Judge Analisa Torres of the Southern District of New York claims that XRP is not a security.