The US Securities and Exchange Commission is set to impose the largest fine yet on a cryptocurrency project: a $5.3 billion fine for Do Kwon and Terraform Labs, the man and company behind the fatally flawed algorithmic stablecoin that launched a multibillion-dollar industry. — a widespread contagious event when it exploded two years ago.
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After a lengthy investigation and a relatively short two-week trial in New York earlier this month, Kwon and Terraform were found guilty of fraud — concealing the obvious dangers lurking in a trading scheme that purportedly KEEP the solvency of the UST stablecoin and offered unsustainable 20% returns.. Terraform's Anchor lending platform. Kwon, who was arrested last year in Montenegro on a false passport, did not attend the trial. He is currently awaiting extradition to either the United States or his native South Korea.
A monetary fine is not a done deal; the final punishment will be determined by the court. But according to an April 19 court filing, the Securities and Exchange Commission (SEC) said it was seeking to send «an unambiguous message.»
Experts say the giant fine is a sign the SEC is playing more games as it follows a proposed $1.8 billion fine for Ripple. (And this follows a $4.3 billion fine imposed on Binance by a group of US regulators, although the SEC was apparently not involved in that settlement and prosecutors this week are demanding that former Binance CEO Changpeng Zhao spend three years in prison. .)
“The recent high-profile cases against Terra/Do Kwon and Ripple, with fines reaching into the hundreds of millions or even billions of dollars, really signal a change in SEC strategy,” Andrea Tosato, an associate professor at the University of Pennsylvania Law School, told CoinDesk.. . “Overall, I would say that it appears the SEC is trying to make it clear that … the reward is simply not worth the risk.”
While SEC Chairman Gary Gensler has been more or less anti-crypto since taking office in 2021, the financial carnage caused by the collapse of Terra, Three Arrows Capital and FTX in 2022 has made an attempt to bring the industry into a national priority. order. The Biden administration, for example, sent out a memo noting that regulating crypto would be a “whole of government” effort.
And so Binance, Ripple, and now Kwon and Terraform are feeling the brunt of this.
Although Terraform's lawyers argue that the US does not have jurisdiction, they are now asking for the fine to be capped at $3.5 million.. Kwon's defense council proposed a maximum fine of just $1 million.. For its part, Ripple proposed a civil penalty of no more than $10 million, arguing that the SEC's proposed fine was excessive as it was more than 20 times the amount it ever received from the Crypto settlement.
To some extent this is true. The SEC was able to recover more than $1.2 billion from Telegram, but almost all of that amount had to be returned to investors, while the popular messaging company only had to pay a civil penalty of $18.5 million. It was in the spirit of Blok. ONE civil penalty of US$24 million in 2019. (CoinDesk is owned by Bullish, which in turn is majority owned by Block. ONE ). The fine was just over $9 million.
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So what explains the SEC's seemingly aggressive turn? Rutgers Law School professor Yulia Guseva suggested that this is most likely a confluence of factors, including the fact that as the size of Crypts increases, so does the likelihood of their leakage.. But there is also a legal strategy of “terror,” which, as the Latin word suggests, is designed to instill fear in the industry and encourage compliance.
“The latest approach indicates that the SEC may be strategic in its choices as it attempts to bring crypto within the purview of securities law,” Guseva told CoinDesk in an interview.
According to Tosato, disgorgement is actually nowhere mentioned in securities laws, but has been standard procedure since the 1970s as a way to return funds to investors and prevent future violations. On the other hand, civil penalties owe Social Networks a set of rules that includes the degree of illegality, the actual (or potential) harm caused to investors, and the extent to which the defendants complied with the demands of regulators.
In practice, however, the process «does involve a certain degree of discretion that the SEC exercises within the established legal framework,» Tosato added. While increasing fines for firms is certainly intended to send a signal to others, Tosato said he is not doing that. I don't think the SEC is «particularly behind what it has done in other industries» when it comes to clear cases of fraud and securities violations, of which there are many.
“In my opinion, the difference is that the applicability of the regulatory framework in crypto is much more uncertain than in many industries,” Tosato said. “Recent case law continues to leave many unresolved questions.”
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