Galaxy Digital, the cryptocurrency investment firm led by Michael Novogratz, has agreed to pay a $200 million settlement following allegations that it misled investors while promoting the now-defunct cryptocurrency Terra ($LUNA).
The settlement, announced by the New York Attorney General’s Office, comes after accusations that Galaxy Digital failed to disclose its financial stake in $LUNA while publicly endorsing the asset.
According to court documents filed on 24 March, Galaxy Digital acquired 18.5 million $LUNA tokens at a 30% discount and then promoted them without informing investors of its holdings.
The company later sold the tokens, reportedly making over $100 million in profit before $LUNA’s collapse.
The filing further claims that Galaxy Digital misrepresented $LUNA’s adoption by falsely stating that the South Korean payments app Chai was built on the Terra blockchain.
The misleading information was included in a press release sent to Bloomberg, which highlighted that the app had “over 2 million users and generated $1.2 billion in annualised transaction volume”.
“These statements were false. They were based on representations by Kwon and Terraform to Galaxy, but Galaxy failed to independently verify them”, the filing states.
As part of the agreement, Galaxy Digital will pay the settlement in four instalments over three years. The company must pay $40 million within 15 days, followed by another $40 million in one year, and two additional payments of $60 million in the second and third years.
The settlement does not include an admission of wrongdoing by Galaxy Digital, and the company has not issued any statements denying or accepting the allegations.
The Terra-LUNA collapse
The collapse of the Terra ecosystem in May 2022 was one of the most catastrophic events in cryptocurrency history. The crisis began when Terra’s algorithmic stablecoin, TerraUSD ($UST), lost its peg to the US dollar after a large holder sold a significant amount of $UST.
$UST was designed to maintain its value through a mechanism that involved minting and burning $LUNA tokens.
When $UST’s value dropped, the system automatically minted new $LUNA tokens to stabilise the price. However, the excessive supply of $LUNA caused its value to crash, creating a chain reaction that wiped out over $40 billion in market capitalisation.
As reported at the time, the market panic intensified when $LUNA’s market cap fell below $UST’s, making it impossible to sustain the stablecoin’s peg. This triggered a self-reinforcing spiral, leading to the near-total collapse of both assets.
Investors lost billions of dollars overnight, and many retail traders who believed in the project were left with worthless tokens.
The crisis also had a ripple effect across the cryptocurrency sector, leading to the downfall of other firms with exposure to $LUNA, such as Three Arrows Capital and Voyager Digital.
Even today, the memory of the Terra crash lingers, influencing how investors perceive algorithmic stablecoins.
The recent launch of Sonic blockchain’s high-yield stablecoin has been met with scepticism, with some industry figures warning of potential risks reminiscent of Terra’s failed model.
Regulatory consequences
The Terra collapse prompted a wave of legal actions against entities involved in its promotion. Terraform Labs and its founder, Do Kwon, who is currently detained in Montenegro, previously reached a $4.7 billion settlement with US authorities.
Jump Crypto, a market-making firm linked to the case, also agreed to pay $123 million in a separate settlement.
The lawsuit against Galaxy Digital was brought under the Martin Act, which grants the New York Attorney General broad powers to investigate securities fraud.
The case alleged that Galaxy misled investors by failing to disclose that it was selling $LUNA while publicly supporting it.
Despite the allegations, Galaxy Digital’s CEO, Mike Novogratz, expressed his desire to move past the legal battle.
“Settling this matter will help Galaxy move forward and minimise distractions. Our focus remains on driving innovation and growth in digital assets and artificial intelligence infrastructure”, ” said Novogratz.
The settlement also includes a series of compliance measures designed to prevent similar conflicts of interest in the future.
These measures require Galaxy Digital to conduct legal reviews of token investments and ensure greater transparency around promotional activities and staff holdings.
The implosion of Terra and its stablecoin had far-reaching consequences beyond just financial losses. It marked a turning point for regulatory scrutiny in the cryptocurrency sector, with authorities worldwide increasing oversight on stablecoins and crypto firms.
The US Securities and Exchange Commission (SEC) ramped up investigations into crypto companies, with stablecoins now facing stricter regulatory proposals.
Many jurisdictions have since pushed for stablecoins to be backed by real-world assets, rather than relying on algorithmic mechanisms similar to Terra’s failed model.
The European Union also responded with the Markets in Crypto-Assets (MiCA) regulation, which introduced strict requirements for stablecoin issuers to ensure their tokens remain backed by tangible reserves.
In South Korea, authorities launched criminal investigations into Terraform Labs and its executives, further signalling a global shift toward stricter enforcement in the digital asset space.
Market confidence in algorithmic stablecoins remains low, with investors now favouring asset-backed stablecoins such as $USDC and $USDT. Experts believe the Terra debacle accelerated the move toward a more regulated and transparent crypto market.
“The Terra collapse was a wake-up call. Investors and regulators alike are now much more cautious about stablecoins and how they function”, said a regulatory expert at Coincu.
Despite facing legal scrutiny, Galaxy Digital’s financial health remains strong. The company recently reported a net profit of $174 million in Q4 2024, with a robust annual performance.
Analysts suggest that while regulatory hurdles may pose challenges, Galaxy Digital’s strategic partnerships and client offerings could sustain its recovery.
Meanwhile, the cryptocurrency market continues to experience volatility. According to CoinMarketCap, $LUNA is currently trading at $0.20, with a market capitalisation of $138.5 million.
Over the past 90 days, $LUNA’s price has dropped by 54.32%, reflecting continued uncertainty surrounding the token.
Regulatory experts see the settlement as part of a broader crackdown on misleading crypto promotions.
Moving forward, crypto firms are likely to face increased pressure to provide clear disclosures regarding their financial interests in the assets they promote.
The Terra-LUNA debacle remains one of the most significant events in cryptocurrency history, with its impact still shaping regulatory and market trends.
As enforcement actions continue, the industry faces a new reality—one where transparency and accountability will be key to maintaining investor trust.
