The US Securities and Exchange Commission is seeking to impose its heaviest fine yet on a cryptocurrency project, a $5.3 billion fine for Do Kwon and Terraform Labs, the man and company behind the fatally flawed algorithmic stablecoin which started a multi-billion dollar industry. widespread contagion event when imploded two years ago.

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After a prolonged and relatively two week short trial in New York earlier this month, Kwon and Terraform were considered responsible for fraud – hiding obvious dangers hidden 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, who was arrested in Montenegro on a false passport last year, did not attend the trial. He is currently awaiting extradition to the US or his native South Korea.

The monetary penalty is not a done deal; a court will decide the final punishment. But what did the SEC say it is seeking, according to an April 19 report judicial filingis to send “an unequivocal message”.

For experts, the gigantic size of the fine is a sign that the SEC is no longer messing around, as follows its proposed fine of US$1.8 billion for curling. (And that comes on the heels of the $4.3 billion fine imposed on Binance by a group of US regulators, although the SEC was conspicuously absent from that deal, and prosecutors this week called on former Binance 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, signal a shift in the SEC’s strategy,” said Andrea Tosato, assistant professor of law at the University of Pennsylvania. , told CoinDesk 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 get the industry back on track. order. The Biden administration, for example, sent a memo noting that regulating cryptography would be a task “whole government” subject.

And then Binance, Ripple and now Kwon and Terraform are feeling the brunt of this.

Although Terraform’s lawyers argued that the US did not have jurisdiction, they are now arguing for capping the fine at $3.5 million. Kwon’s defense counsel suggested a maximum fine of just $1 million. In turn, 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 has already been collected from one crypto deal so far.

This is true, to a certain extent. The SEC managed to collect more than $1.2 billion from Telegram – but almost all of that amount was supposed to be returned to investors, while the popular messaging company only had to pay a civil fine of $18.5 million. This was in line with Bloco.one$24 million civil fine in 2019. (CoinDesk is owned by Bullish, which in turn is majority owned by Bloco.one) In 2022, the year the SEC raised more of enforcement actions with US$6.4 billion in fines, the average civil penalty it was just above US$9 million.

So what explains 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 returns. But there is also the legal strategy of “terrify,” which, as the Latin word suggests, is intended to strike fear into the industry to encourage compliance.

“This latest approach indicates that the SEC can be strategic in its choices when trying to bring the crypto industry within the purview of securities law,” Guseva told CoinDesk in an interview.

Restitution is not mentioned anywhere in securities laws, according to Tosato, but it has been standard operating procedure since the 1970s as a way to return funds to investors and prevent future violations. Civil sanctions, on the other hand, must follow a set of rules, 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 on companies is definitely meant to send a message to others, Tosato said it doesn’t. I don’t think the SEC is “especially unbalanced compared to what it has done in other industries” when it comes to clear cases of fraud and securities violations – of which there are many.

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

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