Singapore-Based Terraform Labs Greenlit For Bankruptcy Wind-Down Following SEC Settlement

Do Kwon's Terraform Labs has received court approval to wind down its operations in a bankruptcy agreement.

On 19 September, a US Bankruptcy Judge Brendan Shannon approved Terraform’s bankruptcy plan, describing it as a “welcome alternative” to further litigation.

The Singapore-incorporated company had faced a lawsuit for defrauding cryptocurrency investors who lost $40 billion when Luna crashed in 2022.

Terraform Labs filed for bankruptcy in January and reached a settlement agreement with the U.S. Securities and Exchange Commission (SEC) for a staggering $4.5 billion.

The agency was seeking $4.7 billion for Terraform Labs and Do Kwon's disgorgement and prejudgment interest, as well as additional civil penalties of $420 million and $100 million for the firm and its co-founder respectively.

D Kwon had argued that a maximum penalty of $1 million is “far more appropriate” than the SEC’s original $5.3 billion request.

Now, the SEC is unlikely to collect much, if any, from the settlement, as it agreed to be paid only after Terraform addresses crypto loss claims during its bankruptcy wind-down. Terraform said it is "impossible to estimate" the total value of crypto losses that will be eligible to be paid during the liquidation.

The firm said it will be able to pay between $184.5 million and $442.2 million to crypto purchasers and other stakeholders as part of its bankruptcy liquidation.

Collapse of UST and Luna

The Terra ecosystem, spearheaded by Terraform Labs, experienced a spectacular collapse in May 2022. UST, an algorithmic stablecoin designed to maintain a 1:1 peg with the US dollar, lost its peg and plummeted in value. This triggered a domino effect, causing the price of Luna, the ecosystem's utility token, to spiral downwards towards near worthlessness. The crash resulted in billions of dollars in losses for investors and the start of a long crypto winter for the rest of the industry.