SEC Update on Terraform Labs

The U.S. Securities and Exchange Commission (SEC) has released an investor information page regarding Terraform Labs, the company behind the algorithmic stablecoin that saw a significant downturn a few years ago.

The SEC addressed inquiries from investors concerning compensation processes following a settlement concluded between the SEC and Terraform Labs last month.

Settlement Details

Terraform Labs agreed to pay $4.47 billion as part of this settlement. This sum includes $3.58 billion in disgorgement and $420 million in civil penalties. Additionally, the terms of the settlement prevent co-founder Do Kwon from holding any officer or director position in a public company.

The SEC noted that it would not receive any funds until all investors and creditors are compensated fully in the ongoing bankruptcy case. A hearing to confirm the Chapter 11 plan is anticipated to take place in the fall.

Background on Charges

In February 2023, the SEC charged Terraform Labs and Kwon regarding the Terra USD (UST) stablecoin, which collapsed the previous year, resulting in substantial financial losses. Algorithmic stablecoins like UST utilize market incentives and algorithms to maintain their price stability, relying on connections to governance tokens like Luna.

In April, a jury determined that both Terraform Labs and Kwon misled investors, leading to their liability for civil fraud.

CFTC Advisory

On the same day, the U.S. Commodity Futures Trading Commission (CFTC) issued a customer advisory alerting the public about the risks of “follow-on frauds.”

Melanie Devoe, director of the CFTC’s Office of Customer Education and Outreach, highlighted the prevalence of relationship confidence frauds or pig butchering frauds, where victims suffer significant losses and are often further harmed by fraud-recovery schemes.

The CFTC provided examples of crypto-related fraud, emphasizing the difficulties in recovering funds once converted to crypto assets like Bitcoin (BTC) or Tether (USDT). The agency cautioned against sending crypto to anyone known only online and recommended verifying if a crypto platform is registered with the Financial Crimes Enforcement Network before engagement.

Both the SEC and CFTC have consistently pursued charges in the crypto sector. CFTC Chair Rostin Behnam revealed that half of the agency’s enforcement docket was crypto-related in the last fiscal year, pointing to the extensive fraud in the crypto market and the significant resources allocated to it amidst regulatory challenges.