US regulatory authorities are requesting that Terraform Labs and its co-founder Do Kwon be fined $5.3 billion for allegedly defrauding investors. This update has been announced after the two parties had been found liable for a massive fraudulent scheme.
As stated in court papers dated April 19, 2024, the US Securities and Exchange Commission (SEC) has formally requested that Kwon and Terraform pay around $4.7 billion in disgorgement as well as prejudgment interest for their alleged involvement in the spectacular demise of Terra-Luna back in 2022.
The SEC is further requesting the court to order Terraform and Kwon to pay $420 million along with another $100 million, respectively, in civil penalties.
The SEC filing stated:
“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,”
Do Kwon and his firm had been found liable for intentionally misleading unsuspecting clients regarding the safety of investing in its algorithmic stablecoin Terra USD (UST) as well as its blockchain / DLT network’s utility. This, according to a New York civil court Jury’s verdict.
Virtual currency investors had reportedly acquired over $2 billion in the UST algorithmic stablecoin via various exchanges and other trading platforms, the court papers reveal.
The SEC said that its suggested penalties are “conservative” and even “reasonable,” especially since most of the gain Kwon generated from Terraform’s failed stablecoin.
The firm and its founder Do Kwon are now challenging the large amount of the civil penalties.
Notably, Terraform Labs says that a max penalty of $3.5 million should be more justifiable and Do Kwon is reportedly offering to pay merely $800,000.
Commenting on this major incident, Chainalysis provides key insights:
“The collapse of TerraUSD (UST) had three stages. First, two traders broke UST’s peg; next, Terraform Labs and three supporters repaired it by purchasing $2B UST; finally, the continued sell-off drained those funds, hyperinflated UST’s sister token LUNA, and crashed the price of both LUNA and UST. UST’s uncollateralized design likely made it more fragile than other stablecoin types. Furthermore, while redemptions of other stablecoins did temporarily peak, the crypto market’s … downturn appeared more closely linked to the tech market decline than to UST’s collapse.”
As noted in an extensive analysis shared by Chainalysis:
“Unlike most stablecoins, UST was algorithmic and undercollateralized. Rather than maintaining its peg by holding assets in reserves, Terraform Labs used a sister token, LUNA, to ‘absorb the price volatility of UST.’ Other stablecoins are overcollateralized by cryptocurrency, like DAI. Borrowers must deposit $1.50 worth of ETH for every DAI they wish to borrow. Still others are fiat-backed and collateralized one-to-one, like USDC. Its reserves are held in cash and short-dated government treasuries.”
Chainalysis further explains:
“Stablecoins also vary in their utility. Both the undercollateralized UST and the overcollateralized DAI serve DeFi, but fiat-backed stablecoins have other use-cases, too.”
