Police officers escort Terraform Labs co-founder Do Kwon after he served a sentence for document forgery, in Podgorica, Montenegro. Image Credit: Reuters

Terraform Labs Pte. and co-founder Do Kwon, after being found liable for fraud by a New York jury last month, told a judge they shouldn't have to pay the $5.3 billion fine requested by US regulators because most of the firm's stablecoins were sold overseas.

The US Securities and Exchange Commission claimed in its lawsuit against Terraform and Kwon, the inventor of the failed TerraUSD stablecoin, that the firm's collapse in 2022 wiped out $40 billion in investor assets and shook the cryptocurrency world.

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But in a filing Wednesday, Terraform lawyers argued the firm's "offers and sales of tokens occurred almost entirely outside the US," and that the SEC provided no evidence to suggest Terraform and Kwon's "limited activities in the US directly caused any losses, much less the billions the SEC seeks in disgorgement."

Terraform and Kwon were found liable for fraud on April 5 after a two-week trial. The SEC then urged the judge to impose the fine, which would be the largest ever for the crypto industry as it comes under increased scrutiny from US regulators. The SEC, in a filing last week, urged the court to send "an unequivocal message that this sort of brazen misconduct" will not be tolerated.

The SEC alleged Terraform and Kwon made more than $4 billion in "ill-gotten gains" from unregistered sales of tokens including LUNA and UST. Terraform's UST, an algorithmic stablecoin that was supposed to be pegged to the price of the US dollar, wiped out $40 billion in market value when it collapsed in 2022.

In a separate motion Wednesday, Kwon's lawyers argued the SEC had failed to show that his work with Terraform had a "foreseeable substantial effect" in the US.

"Mr. Kwon's role in the conduct that forms the basis of the SEC's requested judgment was performed entirely abroad, in Korea and Singapore," his lawyers wrote.

The civil case is US v. Terraform Labs, 23-cv-01346, US District Court, Southern District of New York (Manhattan).