Terraform Labs files for Chapter 11 bankruptcy

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Terraform Labs, the disgraced issuer of LUNA and UST tokens, has filed a voluntary petition for Chapter 11 bankruptcy in the U.S., according to court filings made Sunday.

Though the many legal cases against Terraform Labs and its founder have the company in dire straits, the bankruptcy petition does not mean the immediate end of the company.
Chapter 11 bankruptcy is intended to buy the filer additional time to restructure their debts and other obligations while the company keeps running. During this process, the company is limited in the decisions it can make without the consent of the bankruptcy court.

A statement released by Terraform Labs from CEO Chris Amani confirming the bankruptcy says as much:

“The Terra community and ecosystem have shown unprecedented resilience in the face of adversity, and this action is necessary to allow us to continue working toward our collective goals while resolving the legal challenges that remain outstanding.”

“This step protects our ability to continue working with the community on infrastructure, innovative tools and products, and other ecosystem support. We have overcome significant challenges before and, against long odds, the ecosystem survived and even grew in new ways post-depeg; we look forward to the successful resolution of the outstanding legal proceedings.”

Bankruptcy or no bankruptcy, the writing has been on the wall for Terraform for some time. The company rose to prominence thanks to its (supposedly) stablecoin TerraUSD (UST), which was advertised to be pegged to the value of the U.S. dollar via an algorithm tied to other Terraform Labs’ tokens. That algorithm broke down in 2022, sending shockwaves throughout the industry. The collapse caught the attention of both the SEC and the Department of Justice (DoJ): the former charged both the company and its founder, Do Kwon, with fraudulently selling digital asset securities without registering with the regulator, while the latter brought criminal charges against the same for securities fraud, commodities fraud, and conspiracy.

Both those cases are pending. Kwon is currently awaiting extradition to the U.S. from Montenegro, where he is currently serving a sentence in connection with his attempt to flee the country using false documents. Most recently, Kwon’s incarceration saw his trial with the SEC pushed to late March.

CEO Amani’s confidence notwithstanding, those two trials remain the largest obstacles standing between Terraform Labs and any kind of future post-collapse. If the SEC can prove its case, it will be asking the court to order that the company turns over all of the ill-gotten gains made as a result of selling unregistered digital asset securities, to say nothing of additional monetary penalties. Should that happen (and a lower court has already found that Terraform was likely selling illegal securities), then Terraform’s ability to live up to its promise to pay its employees and creditors will be put in even greater jeopardy.

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