Terraform Labs has received court approval to close down its operations after going through bankruptcy. This decision comes after the company reached a settlement with the U.S. Securities and Exchange Commission (SEC) over its financial troubles related to the collapse of its TerraUSD and Luna tokens, which caused significant losses for investors.
In January 2024, Terraform Labs filed for Chapter 11 bankruptcy protection, and during a recent court hearing, a judge approved their plan to wind down the business.
As part of the settlement with the SEC, Terraform Labs agreed to pay $4.47 billion. The company is expected to distribute between $184.5 million and $442.2 million to its creditors as it liquidates its assets.
Terraform Labs was started in 2018 by Do Kwon and Daniel Shin to change how decentralized finance works. They created stablecoins, which are cryptocurrencies linked to the value of traditional money like the U.S. dollar.
Their main stablecoin, TerraUSD (UST), was different from others because it didn’t rely on reserves of actual money. Instead, it used an algorithm to maintain its value through its relationship with another cryptocurrency, LUNA.
At first, Terraform Labs was successful. They built an entire network of financial applications, and one of the most popular was the Anchor Protocol, which offered high returns to people who deposited UST. The system worked by burning LUNA to create more UST when needed and vice versa, keeping UST stable.
However, in May 2022, things went wrong. UST lost its peg to the U.S. dollar, causing panic among investors. The system designed to keep the value steady couldn’t handle the large number of people selling off UST.
As a result, Terraform Labs tried to create more LUNA to stabilize UST, but this caused LUNA’s value to crash. The more LUNA they created, the worse it got, and both UST and LUNA rapidly lost value.
This caused a massive collapse, with around $60 billion lost in market value. The broader cryptocurrency market was deeply affected, and Terraform Labs has faced serious legal troubles. With this court approval, Terraform Labs is now in the final stages of shutting down, and they will first pay back crypto investors before addressing the SEC’s claims.
In June, Do Kwon, CEO of Terraform Labs who has been a subject of legal troubles in multiple countries came to a settlement agreement with the United States Security and Exchange Commission (SEC). The agreement involved Do Kwon and Terraform Labs to pay a combined $4.5B in civil penalties if accepted by the Judge.
