Terraform Labs and Do Kwon agreed to pay a $4.5 billion fine in the SEC fraud case

According to court documents filed by the U.S. Securities and Exchange Commission (SEC) on Wednesday, Terraform Labs and its former CEO Do Kwon have agreed to pay approximately $4.5 billion as part of a civil settlement. This follows the 2022 collapse of TerraUSD and Luna tokens, which resulted in investors losing approximately $40 billion.

Final judgment content

The judgment against Terraform includes $4.05 billion in restitution and interest, along with a civil penalty of $420 million.

The total judgment amounts to $4.55 billion, which includes a $80 million civil penalty against Kwon. He has agreed to be banned from engaging in cryptocurrency transactions and is required to transfer $204.3 million to Terraform's bankruptcy estate.

Terraform and Kwon have agreed to this judgment.

The U.S. Securities and Exchange Commission stated in a court filing, "This judgment will ensure maximum financial restitution to affected investors and permanently shut down Terraform. Therefore, the proposed judgment is fair, reasonable, and in the public interest.

UST was once one of the largest stablecoins by market capitalization

Before their collapse, TerraUSD (UST) and Luna were among the top cryptocurrencies in their respective categories. UST was one of the largest stablecoins by market capitalization. At its peak, UST was the third largest stablecoin, trailing only Tether (USDT) and USD Coin (USDC).

TerraUSD (UST) differs from traditional stablecoins in several key aspects: UST is an algorithmic stablecoin, which means it maintains its peg through different mechanisms. UST does not have backing from fiat reserves but utilizes an arbitrage system involving its sibling token Luna.

The algorithm adjusts the supply of UST and Luna to stabilize the price of UST. When the price of UST deviates from $1, traders can exchange Luna and UST to bring the price back in line. This is theoretically achieved through market incentives to maintain the peg.

This algorithmic mechanism carries additional risks. If the value of Luna sharply declines, it can trigger a death spiral, disrupting the stability mechanism. This was exactly what led to the collapse of UST and Luna in May 2022, when the market lost confidence in Luna, causing both Luna and UST to rapidly depreciate.

The collapse of UST had a significant impact on the stablecoin market

The collapse of UST raised serious doubts about the stability and feasibility of algorithmic stablecoins. While theoretically these stablecoins maintain their peg to fiat currencies through complex algorithms and incentive mechanisms, in practice, these mechanisms proved ineffective under extreme market conditions.

Investors and regulatory bodies are increasingly focusing on the transparency and reserve backing of stablecoins. Traditional stablecoins like Tether (USDT) and USD Coin (USDC) establish trust by disclosing their reserve holdings and undergoing regular audits. Following the UST incident, there is a growing preference in the market for stablecoins that have clear reserve backing and transparent auditing processes.

The collapse of UST has prompted regulatory agencies to consider strengthening oversight of stablecoins to protect investors and maintain financial stability. Stablecoins are not entirely risk-free financial instruments. Their stability and reliability depend on the soundness of their design, transparency, and support mechanisms. This event carries significant implications for the future development of the cryptocurrency market, potentially leading to stricter regulatory requirements and higher transparency standards.