Terraform Labs, the company behind the failed stablecoin TerraUSD (UST) and its related token LUNA, has filed for Chapter 11 bankruptcy protection in the US. The bankruptcy filing comes after UST and LUNA experienced a catastrophic “death spiral” crash in May 2022, wiping out an estimated $60 billion in investor funds.
Background on Terraform Labs and the Stablecoin Collapse
Terraform Labs was founded in 2018 by CEO Do Kwon with the goal of creating a decentralized algorithmic stablecoin called TerraUSD. Unlike traditional stablecoins backed by reserves, UST aimed to maintain its $1 peg through a complex system of minting and burning connected to LUNA.
Key Events Leading Up to Bankruptcy Filing
| Date | Event |
|---|---|
| May 2022 | UST loses peg; “death spiral” sell-off begins |
| May 12, 2022 | LUNA falls from $85 to less than $0.01 |
| May 13, 2022 | UST falls below $0.30; crash wipes out $60 billion |
| Jan 20, 2024 | Arrest warrant issued for Do Kwon |
| Jan 22, 2024 | Terraform Labs files Chapter 11 bankruptcy |
In early May 2022, UST began to rapidly lose its 1:1 dollar peg, setting off a “death spiral” effect. As UST fell, traders rushed to exit positions in both UST and LUNA. This led to a massive supply shock for LUNA, with the token plunging from around $85 on May 9 to less than $0.01 just three days later. In total, over $60 billion was wiped from the combined market cap of UST and LUNA during the crash.
The mechanisms that were supposed to maintain UST’s $1 peg completely broke down, and the stablecoin tumbled as low as $0.30. The failure shook faith in stablecoins and the cryptocurrency industry as a whole.
In the aftermath, Terraform Labs co-founder Do Kwon proposed revival plans to relaunch LUNA and UST, but these were met with opposition from regulators and law enforcement. Kwon is currently wanted by South Korean prosecutors and an arrest warrant was issued on January 20, 2024.
Terraform Labs Files for Chapter 11 Bankruptcy
With Terraform Labs facing over $100 million in liabilities and multiple investigations and lawsuits, the company board voted to file for Chapter 11 bankruptcy on January 22, 2024.
Chapter 11 bankruptcy allows the company to restructure and establish a recovery plan while gaining protection from creditors. The filing was made in the District of Delaware.
In the bankruptcy filing, Terraform Labs claims to have less than $100 million in assets and liabilities up to $1 billion. The company will use the bankruptcy process to attempt to develop a plan that will provide some restitution to creditors and stabilize the business.
“The Chapter 11 filing will allow Terraform Labs to establish a path for restructuring that maximizes value for all creditors and preserves the vision for the growth of the Terra blockchain,” the company said in a statement.
Legal Fallout and Ongoing Investigations
In addition to the bankruptcy filing, Terraform Labs and Do Kwon are facing growing legal jeopardy on multiple fronts over the UST/LUNA collapse.
South Korean prosecutors have been investigating Terraform Labs for allegations of illegal activity behind the scenes that inflated the Luna token price as well as violations of investor protection laws. This led to the arrest warrant issued for Do Kwon.
In the US, Terraform Labs is facing several class action lawsuits alleging the collapse amounted to fraud and false advertising of UST’s stability. Damages sought exceed $200 million from various plaintiff groups.
Regulators have also launched formal investigations into the firm, including the US Securities and Exchange Commission (SEC) and South Korea’s Financial Intelligence Unit. Findings from these probes could result in heavy fines or criminal charges.
What Comes Next for Terraform Labs?
The Chapter 11 bankruptcy filing buys Terraform Labs some temporary relief and the chance to strategize their next moves.
Possible Next Steps
- Develop comprehensive restructuring plan
- Negotiate with creditors on repayment percentage
- Propose token relaunches to raise fresh capital
- Attempt settlement of lawsuits
- Make organizational changes to leadership
However, the path forward for the company remains highly uncertain. With investigations ongoing and lawsuits pending, Terraform Labs continues to face major legal and financial headwinds. Founder Do Kwon’s future also hangs in limbo amid the criminal charges he faces.
For now, the bankruptcy court will work with Terraform Labs on assessing remaining company assets and developing the best route to handle creditor repayment. But for many UST and LUNA investors who suffered losses, the damage has already been done.
While Terraform aimed to build the future of decentralized stablecoins, the catastrophic failure of their signature token has severely tarnished their reputation. It remains to be seen if Terraform Labs can recover and rebuild trust after this historic cryptocurrency collapse. But the bankruptcy filing closes one grim chapter and opens an uncertain new one for the fallen crypto firm.
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