Terraform Labs, the company behind the failed TerraUSD and Luna cryptocurrencies, has filed for Chapter 11 bankruptcy protection in the United States. The filing was made on Sunday, January 22nd, 2023 in a Manhattan court.
Terraform Labs listed estimated assets and liabilities in the range of $100 million to $500 million in the bankruptcy filing. The number of creditors is estimated to be between 100 and 199. Majority shareholder Do Kwon, who co-founded Terraform Labs, is listed as owning 92% of the company’s shares. Kwon’s address is registered in Singapore, where Terraform Labs is incorporated.
The collapse of TerraUSD and Luna back in May 2022 wiped out around $40 billion from the cryptocurrency market. The spectacular failure was a major blow to the credibility of so-called stablecoins, which are designed to maintain a steady value.
TerraUSD (UST) was supposed to be pegged 1:1 to the US dollar. But once the peg was broken, UST and Luna entered death spirals from which they could not recover. The implosion also took down Three Arrows Capital, a major crypto hedge fund that had bet big on Luna.
Kwon is currently in jail in Montenegro awaiting likely extradition to the United States in March. He was arrested along with an associate in September 2022 for traveling on forged passports. Kwon faces securities fraud charges in the US for his role in developing and promoting UST and Luna.
Prosecutors allege that Terraform Labs misled investors by claiming that UST was fully backed by reserves when this was not the case. Kwon is also wanted on similar charges in South Korea, his home country. Reports indicate that he and some Terraform Labs associates fled to Singapore between April and May 2022 to escape prosecution.
The bankruptcy filing puts Kwon on track to join other major figures from the recent crypto market downturn. Sam Bankman-Fried of FTX and Alex Mashinsky of Celsius Network have also been charged with fraud related to their failed firms.
The implosion of TerraUSD and Luna was a seminal event in the broader “crypto winter” that began in 2022. Major exchanges and lenders like Celsius Network, Voyager Digital and BlockFi have filed for bankruptcy protection or are attempting to restructure.
While Terraform Labs and Kwon face legal troubles, competitor firm Coinbase is battling securities fraud accusations from the SEC. Coinbase is expected to win full dismissal of the charges as soon as the first half of 2023.
The cryptocurrency industry remains under intense scrutiny from regulators after the massive losses suffered by investors. But advocates hope that clearer regulatory frameworks will support future growth, even if more turbulence lies ahead.
The Terraform Labs bankruptcy filing represents the end of the road for what was once a high-flying firm in the crypto space. But it offers a cautionary tale for other players in the nascent digital asset industry. Responsible development and transparent communication will be key to rebuilding trust and stability.
