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Do Kwon’s huge fine shows that the SEC is tightening sanctions against crypto companies
The U.S. Securities and Exchange Commission is seeking to impose the largest fine yet on a cryptocurrency project, a $5.3 billion fine on Do Kwon and Terraform Labs, the man and company behind the fatefully algorithmic stablecoin defective product that sparked a multi-billion dollar industry. -large contagion event when imploded two years ago.
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Following a lengthy investigation and relatively short two week trial in New York earlier this month, Kwon and Terraform were held accountable for fraud, hiding obvious dangers lurking in the trading scheme that would supposedly keep its UST stablecoin solvent and the unsustainable 20% yields offered by Terraform’s Anchor lending platform. Kwon, arrested last year in Montenegro with a false passport, did not attend the trial. He is currently awaiting extradition to the United States or his native South Korea.
The financial penalty is not a done deal; a court will decide the final punishment. But what the SEC said it wanted to achieve, according to an April 19 report filing in courtis to send “an unambiguous message”.
For experts, the gigantic size of the fine is a sign that the SEC is no longer joking, as follows proposed a $1.8 billion penalty for Ripple. (And it comes right after the $4.3 billion fine imposed on Binance by a group of US regulators, even though the SEC was conspicuously absent from that deal, and prosecutors this week asked former Binance CEO Changpeng Zhao to spend three years in prison.)
“The recent high-profile cases against Terra/Do Kwon and Ripple, with fines reaching hundreds of millions or even billions of dollars, signal a shift in the SEC’s strategy,” the University’s assistant law professor told CoinDesk of Pennsylvania Andrea Tosato in an interview. “Overall, I would say it appears the SEC is trying to send the message 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 it a matter of national priority to try to return to the order sector. The Biden administration, for example, sent out a memo stressing that regulating cryptocurrencies would be an exercise “the whole government” deal.
And so Binance, Ripple and now Kwon and Terraform are feeling the brunt of it.
While Terraform’s lawyers argued that the United States lacked jurisdiction, they are now arguing to cap the fine at $3.5 million. Kwon’s defense counsel recommended a maximum fine of only $1 million. For its part, Ripple proposed a civil penalty of no more than $10 million, arguing that the SEC’s suggested fine was excessive because it was more than 20 times what it had ever collected so far from a crypto deal.
This is true, to some extent. The SEC managed to collect over $1.2 billion from Telegram, but almost all of the amount had to be returned to investors, while the popular messaging company only had to pay a civil penalty of $18.5 million. This was in line with Block.oneof $24 million in civil penalties in 2019. (CoinDesk is owned by Bullish, which in turn is majority owned by Block.one) In 2022, the year the SEC earned more from enforcement actions with fines of $6.4 billion, the average civil penalty it was slightly more than $9 million.
So what explains the SEC’s seemingly aggressive turn? Yuliya Guseva, a professor at Rutgers Law School, suggested that a confluence of factors is likely, including the fact that as crypto projects grow in size, so does the potential for disgorgement. But there is also the legal strategy of “terror”, which, as the Latin word suggests, is intended to strike fear into the industry to incentivize compliance.
“This latest approach indicates that the SEC may be strategic in its choices in attempting to bring the cryptocurrency industry under the umbrella of securities law,” Guseva told CoinDesk in an interview.
According to Tosato, divestment is not mentioned anywhere in securities laws, but it has been standard operating procedure since the 1970s as a way to return funds to investors and deter future violations. On the other hand, civil penalties should follow a rulebook, which includes the degree of illegality, the actual (or potential) harm caused to investors, and the extent to which defendants have complied with regulators.
However, in practice, this process “involves a certain degree of discretion that the SEC exercises within established legal frameworks,” Tosato added. While increasing the amount of fines to businesses is certainly intended to send a message to others, Tosato said he doesn’t do that. I don’t think the SEC is “particularly out of line with what it has done in other industries” when it comes to clear-cut cases of securities fraud and infringement – of which there are many.
“In my opinion, what is different is that the applicability of the regulatory framework in the cryptocurrency sector is much more uncertain than it is in many sectors,” Tosato said. “Recent case law continues to leave many questions unresolved.”