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May 19, 2024

Terraform Labs Files for Chapter 11 Bankruptcy After Massive Crypto Collapse

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Jan 22, 2024

Singapore-based blockchain company Terraform Labs, founded by Do Kwon, filed for Chapter 11 bankruptcy protection in the U.S. on January 21st, 2023. This comes after the spectacular collapse of TerraUSD (UST) and LUNA cryptocurrencies in 2022, which wiped out an estimated $60 billion in investor funds.

Lead Up to Bankruptcy Filing

Terraform Labs was the creator of algorithmic stablecoin TerraUSD (UST) and its sister token LUNA. UST was designed to maintain a 1:1 peg to the U.S. dollar through a complex minting and burning process with LUNA.

In May 2022, UST lost its peg as crypto markets declined, setting off a “death spiral” that caused the prices of UST and LUNA to plummet near zero in a matter of days:

Date UST Price LUNA Price
May 7 $0.99 $81
May 11 $0.30 $0.11
May 13 $0.09 $0.000016

The failure shook confidence in stablecoins and the wider crypto industry. Multiple lawsuits and government investigations into Terraform Labs and Do Kwon soon followed.

Facing mounting legal troubles, Terraform Labs filed for bankruptcy along with two new companies it created to revive the Terra ecosystem – Terra 2.0 and Luna Foundation Guard.

Details of the Bankruptcy Filing

Terraform Labs filed its bankruptcy petition in the U.S. District Court for the District of Delaware on January 20th, 2023. The filing shows:

  • Estimated assets between $1 billion to $10 billion
  • Estimated liabilities between $1 billion to $10 billion
  • Between 50-99 creditors with unsecured claims

The company plans to continue operations during the bankruptcy, which will protect it from creditor lawsuits while it restructures.

Terraform Labs CEO Do Kwon stepped down from his role just days before the filing. He stated the move allows the company to continue rebuilding “without outsized influence or distraction.”

However, Kwon remains under criminal indictment in South Korea for alleged violations of capital markets law linked to the UST/LUNA collapse. An arrest warrant was issued in September 2022 when he fled the country to evade prosecution.

What Terraform Labs Says About the Filing

In a Substack post, Do Kwon wrote that the Chapter 11 filing will finally give Terraform Labs “breathing room” from litigation and a chance to compensate users:

“The Chapter 11 process will allow the market to determine through the ultimate stakeholder – our community – how to allocate any reorganized TFL’s assets or future revenue most equitably and for the ecosystem’s benefit.”

The company echoed this sentiment in an official statement, saying bankruptcy will facilitate a “comprehensive restructuring” to fairly pay back creditors:

“TFL remains committed to working with regulators and authorities to clarify any misunderstandings and resolve any issues…We expect the Chapter 11 process to create the stability needed for ecosystem restoration and growth.”

Reaction from Investors and Crypto Industry

The response from defrauded UST and LUNA holders has been largely negative so far. Many call the bankruptcy filing a tactic to escape legal liability.

“This changes nothing. Kwon is still on the run. Declaring bankruptcy won’t liquidate your stolen BTC,” wrote one critic on Crypto Twitter.

Others allege Terraform Labs shifted assets to shell companies to hide money from creditors:

“They purposely transferred assets out so the bankruptcy estate has nothing for creditors. And Kwon still lives lavishly in Serbia,” a Redditor claimed.

Most analysts say it’s unlikely investors will recover much, if any, of their initial investments. Legal battles to claim remaining company assets could drag out for years.

Nonetheless, some industry observers argue allowing Terraform Labs to restructure gives the Terra ecosystem its best chance at rebuilding.

What Comes Next for Terraform Labs

Now that the bankruptcy petition is filed, Terraform Labs will have to submit financial disclosures, a restructuring plan, and establish a creditors’ committee.

The court will ultimately decide whether to approve any proposed reorganization plan. Major hurdles include valuating remaining assets and negotiating fair compensation for different creditor classes.

Meanwhile, Do Kwon remains a wanted fugitive. He continues communicating plans for Terra’s revival from unknown locations abroad. It’s unclear if or when he will turn himself in to stand trial in South Korea.

The collapse of UST and LUNA stands as one of crypto’s biggest failures. While Terraform Labs attempts to rise from its ashes in bankruptcy court, investor trust in stablecoins broadly – once seen as the safest crypto assets – remains deeply shaken.

The path forward for the Terra ecosystem Led my the embattled Do Kwon thus looks rocky at best even with court protection. But the bankruptcy filing does offer a chance for closure with creditors and lessons for decentralized finance moving forward.

AiBot

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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