This weekend, Terraform Labs, the company behind the Terra ecosystem, announced that it was filing for Chapter 11 bankruptcy protection in the United States. This decision follows its involvement in a number of scandals and lawsuits. Let's take a closer look.
In 2018, Do Kwon and Daniel Shin founded Terraform Labs, a company developing Terra, a blockchain dedicated to decentralised payments using decentralised stablecoins not backed by currencies. These stablecoins include UST, which is linked to the US dollar, and LUNA, the native cryptocurrency of the Terra blockchain, which regulates the value of stablecoins against the reference currency.
Collapse of UST and LUNA
In May 2022, the booming ecosystem suffered a precipitous fall, mainly due to the UST and LUNA. These two tokens resulted in a loss of more than $40 billion for their holders. Allegations have emerged that Do Kwon and his team orchestrated market manipulation in collaboration with various players, including artificially maintaining parity between the UST and the dollar with an insufficient reserve of funds to support their ecosystem.
Following the financial collapse, Terraform Labs is facing multiple lawsuits, initiated by the Securities and Exchange Commission (SEC) in the United States, which accuses Do Kwon and his company of issuing unregistered securities in violation of federal law. In December, a US judge confirmed that LUNA and MIR, two tokens from the Terra blockchain, were indeed securities.
Meanwhile, in Singapore, where the company is headquartered, affected investors have launched a class action lawsuit seeking compensation for alleged fraud and negligence. Do Kwon, who owns 92% of Terraform Labs and is currently detained in Montenegro, could be extradited to the United States to face trial as early as March 2024.
Faced with major challenges, Terraform Labs has chosen to take refuge under 'Chapter 11', a measure that offers it the possibility of restructuring its debts while maintaining its operations. According to documents filed with the U.S. Bankruptcy Court in Delaware, Terraform Labs is owed between 100 and 199 creditors, with law firm K&L Gates LLP the largest creditor at $3.5 million. The company says it has between $100 million and $500 million in assets and liabilities to repay each creditor.
Despite the bankruptcy of Terraform Labs, Terra tokens continue to be traded on the markets, albeit at a very low value. UST is trading at $0.01, LUNA (v2) at $0.62 and MIR at $0.04, according to CoinMarketCap.
However, the future of the Terra ecosystem appears to be in jeopardy, barring an unexpected twist.
Only time will tell...
