Terraform Labs has received court approval to wind down its operations in bankruptcy, following a significant settlement with the US Securities and Exchange Commission (SEC) just four months ago.
This decision comes after the company faced accusations of defrauding investors during the catastrophic collapse of its TerraUSD and Luna tokens in 2022, resulting in estimated losses of $40 billion.
US Judge Approves Terraform Labs Bankruptcy Plan
First reported by Reuters, US Bankruptcy Judge Brendan Shannon approved Terraform Labs’ bankruptcy plan at a hearing on Thursday September 19, calling it a “welcome alternative” to protracted litigation over investor losses.
Terraform Labs, which filed for bankruptcy in January, agreed to a $4.47 billion settlement with the SEC after a Manhattan jury found the company liable for fraud in April following the lawsuit filed by the regulator in February 2023.
One notable aspect of the settlement is that the SEC will receive little, if any, of the settlement amount until Terraform satisfies claims from crypto investors as part of its bankruptcy process.
The company indicated that it is currently “impossible to estimate” the total value of crypto losses eligible for compensation during the liquidation phase.
Terraform Labs has projected that it will be able to distribute between $184.5 million and $442.2 million to affected crypto purchasers and other stakeholders as part of its bankruptcy liquidation.
The SEC’s allegations centered around Terraform and its founder, Do Kwon, who were accused of misleading investors regarding the stability of TerraUSD, a stablecoin intended to maintain a consistent $1 value.
Additionally, the SEC claimed that Terraform falsely stated its blockchain was utilized in a popular mobile payment application in South Korea.
Kwon Faces Criminal Charges In US and South Korea
Following the civil fraud trial, a jury found Kwon and Terraform liable for their actions, prompting the company to settle with the SEC before a second phase of the trial could determine the extent of damages.
Kwon is also facing related criminal charges in both the United States and South Korea, although he has consistently denied any wrongdoing. Kwon is expected to be extradited to South Korea.
However, the Supreme Court of Montenegro has postponed the extradition of Terraform Labs founder Do Kwon to his home country of South Korea, pending a review of the legality of the previous court decisions.
The downfall of TerraUSD and its associated token, Luna, began in May 2022 when TerraUSD failed to maintain its pegged value to the dollar. This failure triggered a market crash that not only affected Terraform but also caused a ripple effect, leading to multiple bankruptcies across the cryptocurrency sector.
At the time of writing, the blockchain’s native token, now called Luna Classic (LUNC), is trading at $0.000086, up 6% in the last 24 hours as the broader market rebounds.
Featured image from DALL-E, chart from TradingView.com