Terraform Labs Ready for Bankruptcy Wind-down After SEC Settlement

Terraform Labs, the creator of the Terra blockchain protocol, has secured court approval to proceed with its bankruptcy wind-down after settling a lawsuit with the U.S. Securities and Exchange Commission (SEC), as reported by Reuters.

The company behind the once-prominent ecosystem is in the process of liquidating its assets and winding down operations following court approval.

The approval is likely putting an end for the company’s bankruptcy process, which has been ongoing since January this year. Bankruptcy Judge Brendan Shannon described the plan as a “welcome alternative” to continued litigation.

Bye-Bye-Bye

The judge’s decision follows the approval from the U.S. District Court for the Southern District of New York in June, which delivered a final consent judgment against Terraform Labs and its co-founder Do Kwon.

As part of the settlement, Terraform Labs was required to pay $4.47 billion, including a $3.58 billion disgorgement fee and a $420 million civil penalty. The company also agreed to cease operations and transfer control of the Terra blockchain to the community.

Following the settlement with the SEC, CEO Chris Amani of Terraform Labs announced the company’s plan to wind down operations. He also confirmed the agreement to shut down operations.

Terraform Labs had “always intended to dissolve” at some point, said Amani at the time, and can now proceed with this plan following the SEC settlement. The company plans to burn its remaining vested and unvested LUNA tokens, committing to a decisive end of the company’s direct involvement with the token.

Terraform Labs also announced plans to sell several key projects in the Terra ecosystem, including Pulsar Finance, Station Wallet, and Enterprise DAO. The proceeds will go towards fulfilling the SEC settlement.

A Big Bill

Terraform Labs’ Do Kwon is also liable for $110 million, with additional assets including PYTH tokens to be transferred to the bankruptcy estate. These assets will aid in covering monetary penalties and compensating investors.

Founded in 2018, Terraform Labs was once a prominent entity in the cryptocurrency sector, known for its algorithmic stablecoins, including its flagship one, TerraUSD (UST). The company also drew huge interest from investors, raising over $200 million from various investment firms.

However, the empire started to collapse in May 2022 as its algorithmic stablecoin UST lost its peg to the U.S. dollar.

The event quickly triggered a massive sell-off of UST and its companion cryptocurrency, LUNA, leading to a loss of approximately $45 billion in market capitalization. The collapse led to the temporary suspension of the Terra network and huge financial losses for investors.

After the sudden fallout, Terraform Labs and its founders faced legal issues.

Do Kwon was subject to an arrest warrant issued by South Korean prosecutors and was added to Interpol’s Red Notice list. The company itself eventually filed for bankruptcy under Chapter 11 in Delaware earlier this year, with assets and liabilities reportedly ranging between $100 million and $500 million.

Terraform estimates it could pay out between $184.5 million and $442.2 million to stakeholders, although the total value of eligible crypto losses is still uncertain.

The latest court approval comes after Terraform Labs reportedly moved 1,075 BTC, valued at approximately $62.81 million, to a new address as part of its final operational steps. The transfer was said to be part of the company’s plan to wind down operations following a settlement with the SEC.

After that transfer, the company’s cryptocurrency wallet still holds about $2 million in various altcoins, primarily Convex Finance’s CVX token and the Governance OHM token.

For the transition to community governance, the company said it will undergo the final chain upgrade under Proposal 4818 before winding down operations.

Following the upgrade, the future of the Terra blockchain depends on community-led initiatives. The firm is now liquidating other assets to fulfill financial obligations from the SEC settlement.