Do Kwon’s Huge Fine Shows the SEC Is Ratcheting Up Penalties Against Crypto Firms

The
U.S.
Securities
and
Exchange
Commission
is
looking
to
impose
its
steepest
fine
yet
on
a
cryptocurrency
project,
a
$5.3
billion
penalty
for
Do
Kwon
and
Terraform
Labs,
the
man
and
company
behind
the
fatally
flawed
algorithmic
stablecoin
that
jumpstarted
a
multi-billion-dollar,
industry-wide
contagion
event
when
it

imploded
two
years
ago.

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Following
a
protracted
investigation
and
relatively

short
two-week
trial
in
New
York
earlier
this
month,
Kwon
and
Terraform
were

found
liable
for
fraud
–
hiding
obvious
dangers
lurking
in
the
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
carrying
a
false
passport
last
year,
did
not
attend
the
trial.
He
is
currently
awaiting
extradition
either
to
the
U.S.
or
his
native
South
Korea.

The
monetary
penalty
is
not
a
done
deal;
a
court
will
decide
the
final
punishment.
But
what
the
SEC
said
it’s
seeking,
according
to
an
April
19

court
filing,
is
to
send
“an
unequivocal
message.”

To
experts,
the
gigantic
size
of
the
fine
is
a
sign
the
SEC
isn’t
playing
around
anymore,
as
it
follows
its

proposed
$1.8
billion
penality
for
Ripple.
(And
it
comes
on
the
heels
of
the
$4.3
billion

fine
imposed
on
Binance
by
a
bundle
of
U.S.
regulators,
though
the
SEC
was
conspicuously
absent
from
that
settlement,
and
prosecutors
this
week
asking
for
Binance
ex-CEO
Changpeng
Zhao
to
spend

three
years
in
prison.)

“The
recent
high-profile
cases
against
Terra/Do
Kwon
and
Ripple,
with
penalties
reaching
hundreds
of
millions
or
even
billions
of
dollars,
do
signal
a
change
in
the
SEC’s
strategy,”
University
of
Pennsylvania
assistant
law
professor
Andrea
Tosato
told
CoinDesk
in
an
interview.
“Overall,
I
would
say
that
it
appears
the
SEC
is
trying
to
send
the
message
that
…
the
reward
is
just
not
worth
the
risk.”

While
SEC
Chair
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
made
it
a
matter
of
national
priority
to
try
to
get
the
industry
in
order.
The
Biden
administration,
for
instance,
sent
out
a
memo
noting
that
regulating
crypto
would
be
a

“whole
of
government”
affair.

And
so
Binance,
Ripple
and
now
Kwon
and
Terraform
are
feeling
the
weight
of
that.

While
Terraform
lawyers
have
argued
that
the
U.S.
lacked
jurisdiction,
they
are
now
arguing
to
cap
the
fine
at
$3.5
million.
Kwon’s
defense
council
suggested
a
maximum
fine
of
only
$1
million.
For
its
part,
Ripple
proposed
a
civil
penalty
of
no
more
than
$10
million,
arguing
the
SEC’s
suggested
fine
was
excessive
because
it
was

more
than
20
times
what
it
had
ever
collected
from
a
crypto
settlement
so
far.

That’s
true,
to
an
extent.
The
SEC
was
able
to
collect
over
$1.2
billion
from
Telegram
–
but
almost
all
of
that
amount
was
meant
to
be
returned
to
investors
while
the
popular
messaging
company
only
had
to
pay
a
$18.5
million
civil
penalty.
That
was
in
line
with

Block.one’s
$24
million
civil
penalty
in
2019.
(CoinDesk
is
owned
by
Bullish,
which
is
in
turn
majority
owned
by

Block.one)
In
2022,
the
year
the
SEC

grossed
the
most
from
enforcement
actions
with
$6.4
billion
in
fines,
the
average
civil
penalty

was
slightly
above
$9
million.

See
also:



‘Down
Infinite’:
A
Ham-Fisted
Attempt
to
Rehabilitate
Do
Kwon’s
Image

So
what
accounts
for
the
SEC’s
seemingly
aggressive
turn?
Rutgers
Law
School
professor
Yuliya
Guseva
suggested
it’s
likely
a
confluence
of
factors
including
the
fact
that
as
crypto
projects
grow
in
size,
so
does
the
potential
for
disgorgement.
But
there’s
also
the
legal
strategy
of

“terrorem,”
which,
as
the
latinate
word
suggests,
is
meant
to
cast
fear
over
the
industry
to
incentivize
compliance.

“This
latter
approach
indicates
that
the
SEC
may
be
strategic
in
its
choices
as
it
attempts
to
bring
the
crypto
industry
within
the
ambit
of
securities
law,”
Guseva
told
CoinDesk
in
an
interview.

Disgorgement
isn’t
actually
mentioned
anywhere
in
securities
laws,
according
to
Tosato,
but
has
been
standard
operating
procedure
since
the
1970s
as
a
way
to
return
funds
to
investors
and
deter
future
violations.
Civil
penalties
on
the
other
hand
are
supposed
to
follow
a
rulebook,
which
includes
the
degree
of
unlawfulness,
the
actual
(or
potential)
harm
caused
to
investors
and
the
extent
to
which
defendants
complied
with
regulators.

However,
in
practice,
this
process
“does
involve
a
degree
of
discretion
which
the
SEC
exercises
within
established
legal
frameworks,”
Tosato
added.
While
ratcheting
up
the
amount
firms
are
fined
is
definitely
meant
to
send
a
message
to
others,
Tosato
said
he
doesn’t
think
the
SEC
is
“especially
out
of
line
compared
to
what
it
has
done
in
other
industries”
when
it
comes
to
clear-cut
cases
of
fraud
and
securities
violations
–
of
which
there
are
many.

“In
my
mind,
what
is
different
is
that
the
applicability
of
the
regulatory
framework
in
the
crypto
space
is
far
more
uncertain
than
it
is
in
many
industries,”
Tosato
said.
“Recent
case
law
continues
to
leave
many
unresolved
questions.”

See
also:



Your
Crypto
Project
Needs
a
Sheriff,
Not
a
Bounty
Hunter


|
Opinion