The U.S. Securities and Exchange Commission (SEC) is ramping up penalties against crypto firms for violating securities laws, as evidenced by the recent $5.3 billion fine imposed on Do Kwon and Terraform Labs.
The proposed fine is by far the largest penalty sought by the SEC against a crypto project, and it comes on the heels of a $1.8 billion penalty proposed for Ripple. The SEC is seeking to send an “unequivocal message” to the crypto industry that it will not tolerate securities fraud.
Terraform Labs and Do Kwon were found liable for fraud in a New York trial earlier this month. The fraudulent scheme involved 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.
The recent high-profile cases against Terra/Do Kwon and Ripple, with penalties reaching hundreds of millions or even billions of dollars, signal a change in the SEC’s strategy, according to University of Pennsylvania assistant law professor Andrea Tosato. The SEC is trying to send the message that the reward is just not worth the risk of violating securities laws.
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.
The recent fines imposed by the SEC are not just about punishing bad actors but also about deterring future violations. Disgorgement, which is the process of returning funds to investors, has been standard operating procedure since the 1970s. Civil penalties, on the other hand, are meant to follow a rulebook that includes the degree of unlawfulness, the actual or potential harm caused to investors, and the extent to which defendants complied with regulators.
However, the process of imposing civil penalties does involve a degree of discretion which the SEC exercises within established legal frameworks. While ratcheting up the amount firms are fined is definitely meant to send a message to others, it does not necessarily mean the SEC is out of line compared to what it has done in other industries when it comes to clear-cut cases of fraud and securities violations.
The SEC’s recent actions are likely to have a chilling effect on the crypto industry, as firms scramble to ensure they are in compliance with securities laws. It remains to be seen whether the SEC’s aggressive approach will ultimately be effective in bringing the crypto industry within the ambit of securities law.
In other news, the price of Bitcoin fell by 3.19% to $64,147.38, while Ethereum fell by 2.62% to $3,125.90. Binance Coin, Solana, XRP, Dogecoin, Toncoin, Cardano, Shiba Inu, and Avalanche also saw price drops. Wrapped Bitcoin and Tron bucked the trend and saw price increases.
Sources:
- https://www.coindesk.com/consensus-magazine/2024/04/24/do-kwons-huge-fine-shows-the-sec-is-ratcheting-up-penalties-against-crypto-firms
- https://cointelegraph.com/news/do-kwon-terraform-labs-ordered-to-pay-5-3-billion-fine-by-sec
- https://www.bloomberg.com/news/articles/2024-04-24/crypto-markets-slide-as-sec-fines-terraform-labs-5-3-billion
- https://decrypt.co/122783/do-kwon-terraform-labs-hit-with-5-3-billion-fine-by-sec
- https://www.reuters.com/technology/crypto-exchange-binancecom-pleads-guilty-us-money-laundering-charges-2024-04-24
- https://www.coindesk.com/price/bitcoin
- https://www.coindesk.com/price/ethereum
