Terraform Labs Files for Bankruptcy Amid Legal Battles Over Failed Stablecoin

Table of Contents

• TLDR

Terraform Labs, the company behind the failed cryptocurrency TerraUSD, filed for Chapter 11 bankruptcy protection in Delaware on January 21st. The Singapore-based company stated that it has estimated assets and liabilities both ranging between $100 million and $500 million.

TLDR

• Terraform Labs filed for Chapter 11 bankruptcy in Delaware, stating liabilities and assets between $100M-$500M
• The company faces ongoing legal issues including a class action lawsuit in Singapore and a trial with the SEC in the US
• The bankruptcy filing will allow Terraform Labs to execute its business plan while navigating the lawsuits
• Co-founder Do Kwon faces extradition to the US by mid-March to stand trial over alleged fraud related to the collapse of TerraUSD
• TerraUSD and its sister token LUNA collapsed in May 2022, destroying billions in investor wealth

TerraUSD, developed by Terraform Labs, was a so-called “stablecoin” that was supposedly pegged to maintain a value of $1. However, in May 2022, TerraUSD lost its peg and collapsed in value along with its sister token LUNA, wiping out an estimated $40 billion in investor wealth in one of crypto’s biggest crashes to date.

The bankruptcy filing comes as Terraform Labs and its co-founder Do Kwon face mounting legal issues across the globe related to the spectacular failure of TerraUSD. Kwon was arrested in Montenegro last year and faces extradition to the United States by mid-March to stand trial on criminal fraud charges leveled by federal prosecutors.

The company is embroiled in a civil lawsuit filed by the Securities and Exchange Commission (SEC) alleging that Terraform Labs sold unregistered securities and committed fraud. The bankruptcy filing will allow the company to reorganize while continuing those legal proceedings.

A class action lawsuit on behalf of TerraUSD investors is also playing out in Singapore where the company is based. The plaintiffs allege that Kwon and Terraform misled them about the stability of the TerraUSD stablecoin.

While entering bankruptcy protection puts a freeze on civil litigation in the U.S., the criminal case against Kwon continues. The charges carry sentences of up to 20 years in prison. Kwon plans to fight the allegations that he orchestrated a multi-billion dollar fraud scheme by misrepresenting the stability of his cryptocurrencies to investors.

The collapse of TerraUSD highlighted the risks associated with stablecoins, resulting in calls for greater regulation. While Terraform claims the bankruptcy process will allow it to move forward with its business plans, the road ahead remains filled with legal and financial uncertainty.

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