Terraform Labs, the Singapore-based cryptocurrency firm behind the failed TerraUSD and Luna tokens, has been granted approval to wind down its operations through bankruptcy. The decision follows a lengthy legal battle with the US Securities and Exchange Commission (SEC) and a devastating loss of $40 billion to global investors, including many from Singapore.
On September 19, US Bankruptcy Judge Brendan Shannon approved Terraform’s bankruptcy plan during a hearing in Wilmington, Delaware. The plan, which includes a settlement with the SEC, brings an end to months of uncertainty for the company. Judge Shannon called the resolution a “welcome alternative” to prolonged litigation over the staggering investor losses.
A Long Road to Bankruptcy
The downfall of Terraform Labs began in 2022 when its algorithmic stablecoin TerraUSD failed to maintain its promised peg to the US dollar. The collapse of TerraUSD, and the closely linked token Luna, sent shockwaves through the cryptocurrency market, leading to a wave of bankruptcies across the industry.
The SEC had accused Terraform Labs and its founder, Do Kwon, of deceiving investors by falsely promoting TerraUSD as a stable and reliable digital asset. According to the SEC, Kwon also misled investors about the widespread use of Terraform’s blockchain technology in South Korea’s popular mobile payment app.
Terraform Labs filed for bankruptcy in January 2024, but the legal battles were far from over. In April, a Manhattan jury found the company and Kwon liable for defrauding cryptocurrency investors. The civil fraud charges stemmed from claims that Terraform had falsely marketed the stability of its digital assets, leading to catastrophic losses when TerraUSD and Luna collapsed.
SEC Settlement and Payout Uncertainty
As part of the bankruptcy wind-down, Terraform agreed to a $4.47 billion settlement with the SEC. However, the regulator is unlikely to collect much from the settlement, as it has agreed to be paid only after claims from crypto investors and other stakeholders are resolved.
The company has stated that it is “impossible to estimate” the total value of crypto losses eligible for payout under the bankruptcy plan. Terraform’s initial estimates suggest it could distribute between $184.5 million and $442.2 million to affected investors. These payouts are far less than the staggering $40 billion lost in the crash, leaving many wondering how much, if any, compensation they will receive.
Kwon’s Legal Battles Continue
While the bankruptcy approval marks a significant step for Terraform Labs, the legal troubles for its founder, Do Kwon, are far from over. Kwon faces additional criminal charges in both the United States and his native South Korea. Despite the mounting legal pressure, Kwon has consistently denied any wrongdoing.
The collapse of TerraUSD and Luna was a defining moment in the cryptocurrency market, triggering a domino effect of bankruptcies and regulatory crackdowns. As the crypto industry continues to recover, Terraform’s bankruptcy wind-down offers a cautionary tale of the risks involved in the volatile digital asset space.
Whether investors will find any solace in the bankruptcy plan remains to be seen, but for many, the losses incurred during the collapse are unlikely to be fully recovered.
