Author: Daniel Kuhn, CoinDesk; Translated by: Tao Zhu, Jinse Finance
The U.S. Securities and Exchange Commission is seeking its heaviest fine yet against a cryptocurrency project, a $5.3 billion penalty against Do Kwon and Terraform Labs, the people and companies behind a fatally flawed algorithmic stablecoin whose implosion set off a multibillion-dollar industry-wide contagion.
Earlier this month, after a protracted investigation and relatively short two-week trial in New York, Kwon and Terraform were found liable for fraud — covering up the obvious dangers lurking in a trading scheme that would allegedly keep its UST stablecoin solvent and the unsustainable 20% yields offered by Terraform’s Anchor lending platform. Kwon, who was arrested in Montenegro last year for possessing a fake passport, did not attend the trial. He is currently awaiting extradition to the United States or his native South Korea.
A fine is not a sure thing; a court will decide the ultimate penalty. But the SEC said it seeks to send a “clear message,” according to an April 19 court filing.
For experts, the huge fines suggest the SEC isn’t playing around anymore, as the SEC has proposed a $1.8 billion fine against Ripple. (Prior to that, U.S. regulators fined Binance $4.3 billion, though the SEC apparently wasn’t involved in that settlement, and prosecutors this week asked Binance’s former CEO CZ to go to jail for three years.)
“The recent high-profile cases against Terra/Do Kwon and Ripple, with penalties in the hundreds of millions and even billions of dollars, really signal a change in SEC strategy,” Andrea Tosato, an assistant law professor at the University of Pennsylvania, said in an interview. “Overall, I would say the SEC seems to be trying to send the message that … the rewards are not worth the risks.”
While SEC Chairman Gary Gensler has been more or less against crypto since taking office in 2021, the financial carnage caused by the collapse of Terra, Three Arrows Capital, and FTX in 2022 has made trying to get the industry on board a national priority. For example, the Biden administration sent out a memo stating that regulating cryptocurrencies would be a “whole of government” matter.
So the magnitude of this is being felt by Binance, Ripple, and now Kwon and Terraform.
Although Terraform lawyers argue that the U.S. lacks jurisdiction, they are now advocating to cap the fine at $3.5 million. Kwon's defense committee recommended a maximum fine of only $1 million. Ripple, for its part, is seeking a civil penalty of no more than $10 million, arguing that the SEC's recommended fine is excessive because it is more than 20 times the fines collected from cryptocurrency settlements to date.
To some extent, it is. The SEC collected more than $1.2 billion from Telegram, but almost all of that amount will be returned to investors, and the popular messaging company will only have to pay an $18.5 million civil penalty. That’s in line with Block.one’s 2019 civil penalty of $24 million. (CoinDesk is owned by Bullish, which is in turn majority-owned by Block.one.) In 2022, the SEC took in the most money from enforcement actions, at $6.4 billion. The average civil penalty was just over $9 million.
So what’s causing the SEC’s seemingly aggressive turn? Yuliya Guseva, a professor at Rutgers Law School, said it’s likely a combination of factors, including the fact that as cryptocurrency projects scale, the potential for illicit gains increases. But there’s also the “fear” legal strategy, which is designed to instill fear in the industry as a whole to incentivize compliance.
“The latter approach suggests the SEC’s choice may be strategic as it seeks to bring the cryptocurrency industry within the ambit of securities laws,” Guseva said in an interview.
Tosato said disgorgement is not actually mentioned in securities laws, but has been standard operating procedure since the 1970s as a way to return money to investors and deter future violations. Civil penalties, on the other hand, are subject to a rulebook that includes the extent of the violation, the actual (or potential) harm to investors, and the extent to which the defendant complied with regulators.
In practice, however, the process "does involve a degree of discretion exercised by the SEC within the established legal framework," Tosato added. While raising corporate fines is certainly intended to send a message to others, Tosato said he doesn't think of the SEC as "particularly unruly compared to what it does in other industries" when it comes to clear cases of fraud and securities violations -- of which there are plenty.
“What’s different, in my opinion, is that the applicability of regulatory frameworks in the cryptocurrency space is much more uncertain than in many industries , ” Tosato said. “Recent case law still leaves many questions unanswered.”
