In a major legal development for the collapsed stablecoin firm Terraform Labs, a Delaware court has approved its Chapter 11 bankruptcy filing. The ruling, delivered by Judge Brendan Shannon, is seen as a “welcome alternative” to prolonging complex litigation over the massive losses incurred by the firm’s investors.
Terraform Labs, infamous for its TerraUSD (UST) stablecoin and accompanying Luna (LUNA) token, became synonymous with one of the biggest implosions in cryptocurrency history. In May 2022, the sudden collapse of TerraUSD and Luna wiped out a staggering $45 billion in market value, sending shockwaves throughout the crypto industry. The disaster triggered a wave of bankruptcies and led to the notorious “crypto winter” that spanned well over a year, with prices plummeting and investor confidence eroding.
One of the most significant casualties of Terraform’s downfall was the crypto hedge fund Three Arrows Capital (3AC), which had substantial exposure to the firm’s tokens. The crash not only led to the collapse of 3AC but also resulted in a tangled web of litigation, as the hedge fund sought compensation for its losses.
Terraform’s Road To Bankruptcy
Terraform Labs initially filed for Chapter 11 bankruptcy protection in January 2024, as the firm struggled to manage its mounting liabilities. The move was aimed at creating a structured process to resolve the financial mess left in the wake of the TerraUSD and Luna collapse. Months later, Terraform agreed to a $4.47 billion settlement with the U.S. Securities and Exchange Commission (SEC) after being found guilty of defrauding investors.
The SEC’s investigation revealed that Terraform’s founder and former CEO, Do Kwon, had misled investors regarding the financial health of the firm. Kwon had assured investors that TerraUSD, a stablecoin pegged to the U.S. dollar, was integrated with a widely-used Korean mobile payments app. However, the collapse of TerraUSD proved those claims were far from reality.
Despite the settlement, the SEC’s chances of collecting the full $4.47 billion remain slim. Terraform’s liquidation process must first prioritize other creditors and stakeholders. The company estimates that it may pay between $184.5 million and $442.2 million in compensation, though it admitted that the total value of crypto-related losses remains “impossible to estimate.”
The Fall of Do Kwon
At the center of Terraform’s downfall is Do Kwon, the disgraced 33-year-old entrepreneur who spent years evading authorities. After the collapse of his firm, Kwon fled to various countries across Europe and Asia, using false passports to avoid capture. His globe-trotting evasion came to an end in December 2023 when he was arrested in Montenegro on charges of using a fake passport.
Kwon’s legal troubles did not stop there. Both South Korea and the United States launched extradition attempts, eager to bring him to justice. Following a ruling by Montenegro’s Supreme Court in August 2024, Kwon now faces extradition to his home country, South Korea, where he will stand trial for his role in the Terraform Labs scandal.
What Lies Ahead?
The approval of Terraform Labs’ bankruptcy marks a critical chapter in a case that has rocked the cryptocurrency world. While the firm’s liquidation may offer some financial restitution to investors, the full extent of the losses from the TerraUSD collapse remains unclear. With Do Kwon now facing extradition, the legal saga is far from over.
Also Read: Terraform Labs Closes With $184.5M To $442.2M In Stakeholder Payouts After $4.7B SEC Settlement
For the broader cryptocurrency industry, Terraform’s collapse serves as a cautionary tale about the risks of stablecoins and the importance of regulatory oversight in an increasingly volatile market.
As the liquidation process continues, investors and regulators alike will be watching closely to see how the remnants of Terraform Labs are handled—and whether any meaningful recovery is possible.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
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