Terraform Labs to Wind Down Operations After Court Approval in $40 Billion Collapse Case

Terraform Labs has received court approval to wind down its operations as part of a bankruptcy settlement tied to the 2022 collapse of its TerraUSD and Luna tokens, which wiped out an estimated $40 billion in cryptocurrency investments. The approval came on Thursday from U.S. Bankruptcy Judge Brendan Shannon during a hearing in Wilmington, Delaware. The judge called the bankruptcy plan a "welcome alternative" to prolonged litigation over the massive investor losses.

SEC Settlement and Bankruptcy Proceedings

Terraform Labs filed for bankruptcy in January 2024, and as part of its settlement, the company agreed to pay $4.47 billion to the U.S. Securities and Exchange Commission (SEC). This followed an April 2024 jury ruling that found Terraform Labs and its founder, Do Kwon, liable for defrauding cryptocurrency investors by misleading them about the stability of TerraUSD, a stablecoin designed to maintain a $1 price.

The SEC settlement, however, will likely result in minimal recovery for the agency. Terraform and the SEC agreed that crypto loss claims will take priority during the company's bankruptcy wind-down. Terraform estimates that between $184.5 million and $442.2 million will be distributed to crypto investors and stakeholders as part of the liquidation, though the exact value of claims is currently "impossible to estimate," according to the company.

Accusations and Investor Losses

The SEC accused Terraform and Kwon of deceiving investors by making false claims about TerraUSD’s stability and Terraform’s blockchain being used in a popular Korean mobile payment app. TerraUSD, designed to maintain its dollar peg through complex algorithms, collapsed in May 2022, causing a chain reaction in the market that also led to the downfall of the closely linked Luna token.

The TerraUSD and Luna collapse triggered a broader market crash that caused multiple crypto firms to go bankrupt, significantly shaking investor confidence. Following the collapse, Kwon faced civil fraud charges and agreed to settle with the SEC before the second phase of the trial, which would have determined damages.

Do Kwon's Legal Battles

Do Kwon is also facing criminal charges in both the United States and his native South Korea. He has denied all accusations of wrongdoing. The collapse of TerraUSD and Luna in May 2022 not only wiped out billions in investor funds but also led to a domino effect of bankruptcies across the cryptocurrency industry.